How to Finance a Renovation

blueprints, calculator and piggy bank

CMHC offers Purchase Plus Improvements program

My recent blogs have focused on purchasing and building new homes. I wanted to pause, re-focus and tackle a topic that is near and dear to my past: buying a house and renovating. I’m going to focus on, specifically, borrowing to accomplish both goals.

First, let me take a moment and explain a little. Typically, you buy a house – you scrimp and save for a down payment, and whatever savings is left you allocate this to your renovation; or maybe you dip into your personal line of credit; or, maybe you apply for a Home Depot/Lowes Department Card. Both seem to be the typical approach to buying and renovating. Though, I propose that there is an easier way to go about this whole project.

I talk a lot about CMHC (Canada Mortgage and Housing Corporation) – they are the folks who insure Mortgages with less than 20% down. They have programs for green financing, new to Canada purchasers, rental properties, vacation/secondary properties – but they also have a fantastic program for renovations. The program is called “Purchase plus improvements” and it deals specifically with Mortgages where the renovation budget is rolled into the balance of the purchase loan.

So, let’s pump the brakes a little here and talk about the reason behind the program. We know that as years go on, home fashions change, home systems age and become less efficient and there just aren’t enough builders and land to be building new homes. If you’ve ever spent a rainy afternoon watching HGTV or the DIY network – you’ll see that renovating a property can significantly change the look and value of the home; and taking this route is becoming more and more popular.

CMHC recognized a shift in the market – there are homes in desirable neighbourhoods that aren’t as desirable as they once were – so they created a program whereby the purchasers are able to finance their renovation project into the balance of their Mortgage. The work these buyers undertake will improve the market value – and CMHC approves the loan to be in excess of the purchase price, but in line with the return on equity with renovations.

Here’s an example of a purchase plus improvements loan we recently completed (names and addresses have been replaced with fictitious ones)

Buyers: John and Mary Smith

Address: 111 Neighbourhood Avenue, Kitchener

Purchase Price: $300,000                              Renovation Budget: $30,000

Down Payment: $16,500 (5% down + 5% of renovation budget)

Renovation plans: Remodel main bathroom, paint interior of entire home, replace air conditioner, build deck and replace main level flooring with hardwood

Improved Value: $330,000

Total Loan (net of CMHC Premiums):     $313,500

                                                                                $285,000 for purchase of 111 Neighbourhood Avenue

                                                                                $28,500 for renovations

Because John and Mary included the renovations in their Mortgage – they avoided having to pull more funds from their savings or borrowing this money from a personal line of credit. They were able to realize the potential of this home by fixing up some of its needs – and now they have the house exactly as they wished. The pre-work they invested into researching the renovation paid off big in the end.

https://www.creditsesame.com/blog/extreme-makeover-home-addition-06302011/

 

More information pertaining to the CMHC program can be found on their website:

http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_020.cfm

Wondered where to get the biggest bang for your buck on renovations? Here are some great resources:

Kathy McCleary – HGTV: http://www.hgtv.com/design/decorating/clean-and-organize/which-home-improvements-pay-off

Scott McGillivray – HGTV: http://www.hgtv.ca/incomeproperty/article/top-5-renos-for-return-on-investment/

Mike Holmes – HGTV: http://www.hgtv.ca/holmesinspection/article/where-to-put-your-reno-dollars/