Purchase Plus Improvements: Financing a Fixer-Upper in Canada

A purchase plus improvements mortgage lets you add the cost of renovations you plan to make right after you buy to the mortgage on the home itself. Here is how the programs work in Canada, how the renovation money is held back until the work is done, and how this compares with other ways to pay for a fixer-upper.

The short version

How it works

You borrow for the home and the work in one mortgage, at one rate. CMHC's program is called CMHC Improvement, Sagen's is Purchase Plus Improvements and Canada Guaranty's is Purchase Advantage Plus. They work in similar ways:

• The value can include the work. Federal rules for insured mortgages cap the value of a home you are buying at its purchase price, but they allow the price plus the estimated cost of planned improvements when the loan also pays for them. The insurers base the loan on that sum or on the value once the work is done, whichever is lower.
• Up to 95% financing. For a home you will live in with one or two units, the insurers allow up to 95% of that value, improvements included. For three or four units, the limit is 90%.
• A bigger down payment. For one or two units, the minimum is 5% of the first $500,000 of the value and 10% of the rest, so the work adds to your down payment.
• The usual limits. With less than 20% down, the value must be under $1.5 million, and the longest amortization is 25 years, or 30 for first-time buyers.
• The usual qualifying. You qualify for the whole mortgage, improvements included, under the rules I explain in How Much House Can You Afford?

How much you can add, and what qualifies

The insurers' published terms set no dollar cap on the improvements, but lenders set their own limits. One lender, RFA, for example, allows the lesser of $40,000 or 20% of the home's initial value on a mortgage that can't be insured, 10% of the value after the work on one that can be insured with CMHC, and more with Sagen or Canada Guaranty if the insurer supports it.

The 10% mark matters elsewhere too: CMHC uses a single advance when the work costs 10% or less of the value after the work, and progress advances, paid in stages, above that, so a major renovation may need a lender that offers progress advances.

• The work should add value. CMHC refers to improvements that are generally accepted to add value to a property.
• Typical work. For eligible improvements, Sagen refers to its Renovation Worksheet, which lists items such as windows, roofing, insulation, wiring, plumbing, flooring, painting, cabinets and heating, as well as driveways, landscaping and decks.
• Chattels don't count. Sagen excludes personal chattels, such as furniture, appliances and electronics.
• Stick to the plan. Peoples Bank's terms, for example, release funds only for the improvements listed in the application, so check with your lender before you change the scope.

Quotes, the appraisal and your offer

Your lender approves the work along with the purchase, so most of the preparation happens before you remove subjects:

• Contractor quotes. Canada Guaranty says the borrower must give the lender quotes for the work, and RFA asks for a detailed list of improvements with the contracts and cost estimates. CMHC adds that plans for a major renovation or a building permit can support the value. Book contractors early, and make sure the seller will let them in.
• An appraisal with two values. RFA, for example, requires an appraisal showing the value as is and the value once the work is done. If the after-work value comes in below the price plus your quotes, the loan is based on the lower number, and you make up the difference; see Home Appraisals.
• Enough time in your subjects. Keep your financing subject until the lender has approved both the purchase and the improvements; see Subject Clauses in BC.
• Permits and approvals. Find out whether the work needs a permit and, in a strata, the strata's approval; see Renovating a Condo.

How the renovation money is released

Lenders handle the holdback in their own way. RFA's published process is one example:

• At closing. The full mortgage is advanced to your lawyer or notary, who completes the purchase and holds back the cost of the improvements.
• The work. You have a set time to finish: RFA allows 180 days from the advance.
• Confirmation. RFA has an approved appraiser inspect the work, at your cost. Sagen and Canada Guaranty say the lender confirms completion with documents such as a report from a qualified professional, paid invoices or photos.
• Release. Once the lender accepts the confirmation, it authorizes your lawyer or notary to release the money.

Because the money comes at the end, ask how your contractor expects to be paid, and plan to cover a deposit, or the full cost if your lender wants paid invoices. Cost overruns are generally yours to pay, and CMHC expects lenders to consider whether you could.

A worked example

Here is how the numbers can work with an insured mortgage, the minimum down payment, a 25-year amortization and an example rate of 4.5%. All figures are examples.

• The plan. You buy a $700,000 home and get quotes of $50,000 for new kitchen cabinets and flooring. The appraiser puts the value after the work at $760,000, so the loan is based on $750,000, the lower figure.
• Down payment. 5% of $500,000 plus 10% of $250,000 is $50,000, or $5,000 more than the $45,000 minimum on the home alone.
• Mortgage. You borrow $700,000, and the 4.00% insurance premium of $28,000 is added, for a $728,000 mortgage. At closing, your $50,000 and $650,000 of the mortgage pay for the home, and $50,000 waits for the work.
• Payments. About $4,029 a month, compared with about $3,770 on the $681,200 mortgage you would have without the work, or about $259 more.
• A lower appraisal. If the after-work value came in at $735,000, the loan would be based on $735,000, and you would need $63,500 of your own money instead of $50,000.

Other ways to pay for the work

• Savings. Simple, if you have money left after your down payment and closing costs.
• A home equity line of credit. The Financial Consumer Agency of Canada (FCAC) says a HELOC can go up to 65% of your home's value, and one combined with a mortgage generally needs at least 20% equity, so it usually isn't an option right after buying with a small down payment.
• Refinancing later. FCAC says you can usually borrow up to 80% of your home's value, and breaking a closed mortgage before its term ends normally means a prepayment penalty. I explain one exception, an insured refinance of up to 90% of the value after the work to add a housing unit such as a secondary suite, in Mortgage Default Insurance.
• A personal loan or line of credit. Lenders offer these for smaller projects, with or without your home as security. FCAC notes that loans secured by your home may come with lower rates.
• A premium refund for energy upgrades. If you buy with a CMHC-insured mortgage and spend at least $20,000 on qualifying energy-efficient renovations, such as insulation or new windows, CMHC Eco Improvement offers a 25% partial refund of your premium. You apply within two years of your mortgage closing.

Questions to ask your lender

• Do you offer purchase plus improvements on the mortgage I want, and what is your limit?
• How long do I have to finish, and what happens if the work runs late or costs more?
• Who confirms the work is done, and what does that cost?
• Is the money released in one payment or in stages, and do I pay interest on it from closing?

Questions buyers often ask me

What is a purchase plus improvements mortgage?

It is a purchase mortgage that also covers renovations you plan to make right after you buy. The renovation money is held back at closing and released once your lender confirms the work is done.

Can I get one with 5% down?

Yes, with an insured mortgage. CMHC, Sagen and Canada Guaranty allow up to 95% of the value on a home with one or two units, but the minimum down payment is worked out on the value including the work, so it is higher than on the price alone.

How much can I add for renovations?

It depends on the lender. The insurers' published terms set no dollar cap, but lenders do: one lender caps the work at the lesser of $40,000 or 20% of the initial value on a mortgage that can't be insured, and at 10% of the after-work value on one insurable with CMHC.

When does my contractor get paid?

The money for the work is usually released after it is finished and your lender has confirmed it, through an inspection or with paid invoices, photos or a professional's report. Plan how you will pay the contractor until then.

Can I use the money for new appliances or furniture?

Usually not. Sagen, for example, excludes personal chattels such as furniture, appliances and electronics. The money is meant for work that adds value to the home itself.

Looking at a home that needs work? Read what to check in an older home and what your home inspector checks, or try my mortgage calculator.

This article is general information, not financial advice. Program terms come from CMHC, Sagen, Canada Guaranty, the federal Eligible Mortgage Loan Regulations, the Financial Consumer Agency of Canada and lenders' published terms, and were current at the time of writing; the example uses illustrative figures, and each lender sets its own rules. For CMHC's program, see CMHC Improvement.