Updated: Sep 12, 2021
Have you ever walked around your home saying, “I wish I had known about that before I bought my house.”
When you buy your first home, you usually have to make a few compromises. You have a property with a garage, but no master ensuite; or a master ensuite, but no finished basement; or a finished basement with a garage, but a kitchen from the 1980s.
A purchase plus improvement (PPI) program, also known as a renovation mortgage, could have been a great fit, only if you had the right guide.
What is a Purchase Plus Improvement Plan (PPI)?
The house with the finished basement and garage is perfect, but the kitchen is a vinyl stain on your final vision. With a PPI program, you can include kitchen renovation costs into the total mortgage amount. This way, you take advantage of a lower interest rate and one monthly payment, making it the cheapest way to complete renovations. While it’s cost-effective, it’s complicated to get a PPI and an experienced mortgage broker should navigate you through this process.
How To Include Renovation Costs Into Your Mortgage
First, a conditional offer on a renovation mortgage program must be made through a lender that offers PPIs and it must be insured by the Canada Mortgage and Housing Corporation (CMHC) or Genworth Canada (now Sagen).
After the offer is made, you will have to acquire at least three quotes from contractors to determine the cost of the renovations. Most renovation projects cost about 10% of the home’s purchase price. If the home is $400,000 the kitchen renovation will cost approximately $40,000. Once the quotes reviewed, an appraiser will assess the value of the house before improvements (as-is) and what the value would be after improvements (as-improved). The PPI program can loan up to 95% of the lesser of the following amounts:
the as-improved value, or
the as-is value plus the cost of improvements
Typically, renovations must be completed within 90 days after move-in. It’s a fast way to turn your new purchase into your dream home, but it does carry upfront costs.
What You Need To Know About Purchase Plus Improvement Plans
The PPI loan amount will be held in trust by your lawyers until the contracted work is complete. That means you’ll need a way to pay the contractors before you are reimbursed by the lawyers. For larger projects over $40,000 or 20% of the purchase price, you can receive payment instalments to cover project costs. In your project budget also include costs for lawyers, home appraisals, and timeline inspections which may not be covered through the PPI. Also, make sure the numbers work. Many borrowers are surprised when they can see the payment differences. Your down payment, insurance premium (if putting less than 20 %down), and the monthly payment will increase with a PPI mortgage. Here’s an example.
No Improvements: $400,000
5% Downpayment: $20,000
Mortgage Insurance Premium (less than 20% downpayment): $15,200
Total Mortgage Cost: $395,200
Monthly Payment: $2,375.59
With Improvements Purchase Price: $400,000
Proposed Improvements: $40,000
As-Improved Value: $440,000
5% Downpayment: $22,000
Mortgage Insurance Premium (less than 20% downpayment): $16,720
Total Mortgage Cost: $434,720
Monthly Payment: $2,613.15
Benchmark Rate – 5.34% 25-Year Amortization Created with the Genworth Canada PPI Calculator With the proposed improvements of $40,000, your monthly payment would increase by $237.56 per month. If you can’t make that monthly addition work, a PPI might not be the right fit. Finally, the best time to look into PPI programs is at the initial purchase. This doesn’t mean that a PPI program isn’t possible at refinancing or with getting a second mortgage. There are few instances where this program is done midterm because of the cost but it could be done on a renewal.
I recommend looking at options like a Home Equity Line of Credit (HELOC) to complete renovations if you have already purchased a home. While you can’t backtrack on your home buying journey, you can share your tips with friends and family. So, point them in the right direction—to me!—and change the home buying outcome to, “I’m so glad we did that.”