Smart homeownership often involves borrowing to uncover a home's potential value through renovation. Sometimes this will take the form of immediate upgrades right after a purchase has closed (read more about CMHC's Purchase-Plus program below). On other occasions, long-time homeowners might tap into (and subsequently increase) the value of their home's equity by either refinancing their current mortgage or setting up a secured line of credit and remodelling with the proceeds. Another popular reason for upgrades via equity take-out is to prepare a tired/dated home for sale. In all cases, working with an experienced broker can save a borrower both money and hassle.
CMHC's Purchase-Plus Program
Any buyer who has purchased a home with less than 20% down is well-familiar with Canada Mortgage and Housing Corporation (CMHC). By their own account, CMHC insures 45% percent of residential mortgages in Canada, totalling over $557 billion. For the majority of these purchases, the premium paid for, "insurance against default", feels inconsequential to the transaction. This is likely because many buyers were never made aware of one of the great features that CMHC offers.
Nearly every homebuyer has a list of "must-haves" that is inevitably trimmed once they begin to explore homes in their price range. Many potential deals are overlooked because of glaring problems or deficiencies requiring too much money to repair. This is where CMHC's "Purchase-Plus Improvements Program" shines.
Quite simply, "Purchase-Plus" allows a borrower to include the cost of planned renovations in their upfront financing. Initially, a quote from a licensed contractor is submitted to the lender (in some cases, a buyer who intends on doing the work themselves can submit a worklist for approval). The lender may order an appraisal to determine that the planned cost of improvements will actually be reflected in the "as-improved" value . Once approved, the extra money is advanced to the lawyer at the time of closing and held in trust until the work is complete. At this point, an inspection confirms the work was done and the money is released to the borrower in order to pay off the incurred cost of improvements.
The best part about this program is that there are no additional fees or rate-premiums payable. It should be noted that the maximum amount of upgrades a borrower can include is 10% of the as-improved purchase price (to a maximum of $40,000). Additionally, buyers are expected to carry the cost of the renovation until completion and the money is released from the lawyer, so there should be a short-term plan for achieving this.
The clear benefit of "Purchase-Plus" is that it allows every buyer to look at a much wider range of properties than they might have otherwise. Critically, houses with old roofs, dated bathrooms/kitchens, or older heating/cooling systems are all eligible for upgrades using mortgage financing instead of higher interest loans, lines-of-credit and credit cards. Every realtor and mortgage broker worth their salt should be aware of this program and be touting the benefits of purchase-plus financing to homebuyers looking for "deals" and not "deal-breakers".
Existing homeowners with ample equity will often look at their options to fund a renovation or home improvement project. Generally, this will boil down to two choices - borrowing via a revolving (ongoing) homeowner's line of credit (HELOC), or borrowing by setting up a new mortgage term via refinance. While each route will have its own advantages and drawbacks depending on the unique needs of the borrower, they can generally be summarized as:
A home equity line of credit's biggest appeal is that it can be tapped incrementally, when funds are needed. For renovation projects that might take months (if not years), a revolving borrowing facility is key. Further, for homeowners about to experience a life change such as a career switch or retirement, the ability to qualify for borrowing might be diminished in the future - setting up a HELOC in advance of this change can make sense. Additionally, HELOCs usually only require a minimum monthly interest payment, never mature, and are 'open' (meaning there is no penalty to pay off the entire balance at any time).
One downside of HELOCs is they often carry a significantly higher interest rate. They are also registered as a "demand" charge on a home's title which can be undesirable (talk to us about the potential consequences of this). Finally, HELOCs can become a debt trap for those lacking the discipline to pay them down when they'd like to.
Pretty much every lender will offer funds for renovation when refinancing and, generally, this wider choice means better chance for approval with a great rate. Most lenders will allow borrowing up to 80% of the home's as-is value, and often the "as complete" when requested meaning that more equity can be accessed compared to a HELOC. Because a refinance is registered with an amortization, the borrower is also guaranteed that their mortgage will be paid down over time (unlike a HELOC).
The biggest drawback to refinancing in advance of a renovation is that most (or all) of the money is received upfront. This means interest will be paid on money that may not be used immediately.
A Final Few Words on Renovation Planning
From the outset, it is important borrowers have as much detail about their renovation plans as possible. Crafting a budget and outlining how much equity would be required will lead to clearer financial decisions. In some cases like purchase-plus financing or draw mortgages, upfront quotes from contractors or suppliers may be required by the lender. It is important that all quotes (and subsequent receipts) are kept for future documentation for lenders, appraisers, accountants and the Canada Revenue Agency.
Appraisals and follow-up inspections are generally required with any renovation financing. That said, there are ways to minimize these costs by knowing what each lender might demand (and rebate) in advance. The greater the organization at all stages of a project, the greater the chance of success.
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