I have had a lot of clients recently ask if there is anyway that they can get renovations or additions added to their mortgage, that they heard of some kind of program that would allow this? The answer is absolutely!
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The program is called “Purchase plus Improvements”(PPI) and it is becoming a lot more popular as of late and could be a good strategy to go with because of 2 reasons. The 2 reasons it’s becoming more popular is because of the new mortgage rules and the lowest mortgage rates we have seen in Canadian history. This is because remodeling your house beforehand can really improve your mortgage, we suggest reading this HMO Mortgage Ultimate Guide to find out more.
What PPI allows you to do is add the cost of a minor renovation or a purchase that will improve the value of your home to your mortgage. If your home is CMHC insured or you are putting down the 20% to get away from CMHC mortgage default insurance, then most lenders will allow you to include a maximum of 10% or $40,000 of the original purchase price, whatever is lower. If you are using Genworth mortgage default insurance they allow for a maximum of 20% or $40,000 of the original price of the home.
Why is this a good strategy do to the new mortgage rules and low interest rates?
- Many people want to make improvements to their homes within the first 5 years in which they buy their property. If you buy at 5-20% down payment, you might not have enough funds available to do the renovations with your savings and have to resort to either an unsecured line of credit (avg 6-7%) or maybe a consumer credit card from a retailer (0% first year maybe then 20% and over after). If you included the renovation from the start you can take advantage of the low mortgage rates and have your home ready from the start and work on smaller projects when the budget allows for it. A big improvement to add to your home is AC, if you are intereted then make sure to contact this ac system installation in cincinnati oh.
- With new HELOC(Home Equity Line of Credit) and refinancing rules set by the Canadian government in July 2012, the max you can get in a HELOC is up to 65% LTV and with refinance 80% LTV. In the past it was 80% and 85% respectively. This and the fact many lenders want a minimum of $25,000 to be increased on the mortgage means that within the first 5 years of your mortgage it will be very hard for anyone with default insurance to get to these limits to take advantage of the equity in your home. Of course, this is unless your home appreciates greatly in that span.
Some common areas allowed as an upgrade or improvement include (of course everything at end of day has to go through the lender to be approved as well as the mortgage default insurance carrier):
- New flooring
- Outer Extentions with the assistance of professionals at watara.com.au
- Kitchen upgrades
- Bathroom upgrades
- A new roof (see Transition Roofing for more information about roof care and maintanance)
- A new furnace
Chattels such as hot tubs, saunas and a lot of landscaping improvements are not generally accepted.
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The process.
Now here is what has to happen in order for you to get the chance to use the PPI:
- Your down payment would be a percentage of the “improved value”, therefore if you are buying a home at $250,000 and putting in $10,000 of improvements, the minimum down payment would be 5% of $260,000. Keep in mind you would still have to show support of 1.5% of the upgraded price for closing costs.
- You would have to go to a licensed professional contractor to provide the lender for the estimates of the upgrades
- On closing day, the lender will forward the funds for the original purchase price to your lawyer.
- Upon completion of the project, an appraiser deemed acceptable by the lender will go to make sure the work was completed and did in fact increase improve the value of the home. This is a cost that you would pay, generally in the $200 to $300.
- After this the lender will release the funds to your lawyer so you can pay the contractor for a job well done!
- Please note, you will be paying for the full upgraded amount of the mortgage from the initial disbursement to your house.
Things to watch out for:
- If you dip below the 10% down payment into the 95 to 90% LTV range, your mortgage default premium increases from 2% to 2.75% so make sure your mortgage advisor works through the math for you to make sure you are making a financially responsible idea.
- Making sure that the contractors know that they will be paid at the end when the job is finished. Some will allow this, some will not. The lender will not pay for any deposits.
I hope this helps and of course if you have any questions about this or anything else to do with mortgages, please do not hesitate to contact me at anytime, day or night, weekday or weekend. Email me at nick@mortgageinottawa.com
