With house prices still rising, sometimes the only home you can afford is a home that needs a bit of updating or needs renovations. But traditional financing can sometimes make these types of home unaffordable. That’s because you first have to come up with a down payment to qualify for a mortgage for the purchase price. Then as soon as you take possession, you have to qualify for some kind of home improvement loan. Not only is it difficult to qualify for two separate loans at the same time, it also makes buying more expensive.
Fortunately, there are innovative programs from mortgage insurers like CMHC and Genworth that are designed for just this purpose. This program helps qualified homebuyers make their new home just right for them, by making customized improvements, immediately after taking possession of their new home! All this is done with one manageable mortgage and with as little as 5 per cent down.
The improvements can’t include structural changes to the home. Some of these improvements include:
- Update or renovate kitchen
- New flooring
- New paint
- Finish or renovate the basement
- New patio or deck
- New energy windows/doors
- Addition of garage, etc.
Some of the parameters of the program are:
- As low as 5 per cent down payment. Conditions apply.
- Up to 20 per cent of the purchase price with a maximum of $40,000 or 10 per cent of the as-improved value, .
- Owner-occupied properties only.
- Down payment is based on the as-improved value.
- Other conditions apply.
For example, the CMHC Improvements program lets qualified buyers borrow up to 10% of the post-renovation value of a house and use that money to cover the cost of renovations. Let’s say the house’s purchase price is $550,000 and the renovations you have in mind would increase its value by $40,000. That means the post-renovation value would be $590,000 so you could borrow $59,000 to cover the renovations.
Straight mortgage with $59,000 line of credit:
- Purchase price $550,000
- Down payment $27,500
- Improvements using line of credit $59,000
- $2,547.83* mortgage + line of credit $454.79** per month
- Total monthly payments: $3,002.62*
Purchase plus improvements:
- Purchase price $590,000
- Down payment $29,500
- Total monthly payments $2,733.13*
- Improved cash flow and lower interest costs
- Living in dream home
To qualify, you have to provide a quote from a contractor at the time of submitting the application to the lender. Once CMHC and your lender approve the renovation amount, it’s then added to your mortgage loan. However, you don’t receive the funds until the renovation is complete and has been appraised or inspected. This usually means you will need a short-term line of credit or come up with the funds ahead of time.
The good news is that some brokers, including ourselves, have partnered with renovators and suppliers to make this program even more attractive. The renovator and suppliers will take care of the financing for you until the project is finished. Once the work is complete the solicitor will pay them directly the cost of the renovation. You will be rest assured that there will be no cost overruns (unless due to unforeseen circumstances), hidden costs and that the job will be completed on time and on budget.
To see whether this type of program can help you affordably improve your new house into the home of your dreams, talk to a mortgage expert and they will provide you with a no-charge analysis of your needs and financial situation.
* Mortgage based on 5 per cent down payment with a fixed rate of 2.99 per cent, closed for 5 years and 25-year amortization.
** Line of credit based on interest rate of 9.25 per cent interest payments only