I am delighted to have been asked by the Realty Queen of Toronto to write a guest blog post while she’s on vacation and could not come up with a better topic than financing a renovation. Why? Those of you who following Aleksandra on twitter (@RealtyqueenTO) and read her blog and facebook page regularly will know that she loves renovations, design, home improvements, and of course, real estate. So I thought it would be a good idea to blog about how to finance a home renovation, especially to first-time (and repeat) buyers who want to immediately add that touch of style they can call their own. Speaking from experience, a renovation is not something that’s easy to live through and something you want to get done right, but done fast – sort of like pulling a band-aid off.
So what is the best way to finance a basic renovation from the start? Simple: “Purchase plus improvements”. Say you paid $400,000 for a property in Toronto, and it needs some work to make it perfect for you. The purchase plus improvements program allows you to increase the price by 10% and use those funds for renovations. In our example, $40,000 can go a long way in bringing a property up to at least a level where you’re happy with it until you are able to save more funds for more renovations.
Using our example, the mortgage that is registered on the property is based on $440,000 MINUS the down payment (if you put down 5%, it would be $418,000 plus 2.75% of CMHC insurance, so $429, 495.00). This is what you are paying from the start back to the lender. However, because you only paid $400,000 to the seller, the lawyer holds back $40,000 that is given by the lender until you finish your renovations.
So how do you pay for a $40,000 renovation while you’re in the process of paying for the down payment, legal costs, etc? One of two ways:
1. Through your own funds or secured/unsecured lines of credit – this allows you to use a wider variety of contractors, and you may be able to secure a better deal on the renovations.
2. Through one of the “big-box” renovation stores (Home Depot, Rona etc), who allow you to pay for renovations AFTER, say 6 months “no payment plan”, but do the renovations at the start.
Obviously #1 is the most ideal choice. You know you’ll be getting the funds back so it is a short-term loan from your own bank usually at interest-only payment. This is ideal because you can negotiate amongst many contractors/service providers. #2 isn’t as flexible however if you do not have access to the 10% for the renovation, this will help you at least get the work done.
Once the renovation is completed, you will ask the lender to send out an appraiser who will ensure all work was done to code, as promised, and will review the invoices. The lender will then issue the funds by telling the lawyer to either pay the invoices directly or pay the funds to the client.
Some things you must know: There are no extra fees to do this. There is no rate premium on your mortgage, no surcharge on the CMHC insurance. The appraisal may be the only cost to you however at times CMHC may cover this. An appraisal typically runs $300.00+hst so the cost is not severe.
You must get plans, permits and budget estimates from contractors to apply for this program. Without this the lender has no idea what you are planning on doing and if the work will be worth what you will pay for it – this is a crucial part of the process and must be done before you close on your purchase, so ensure you get multiple visits to the property before closing!
Thanks so much Jake for this very informative blog post, I think this is a great option for buyers who are looking to renovate and don’t have the cold, hard cash!
For more of Jake’s blogging material about other mortgage related-topics and information, make sure to check out his site www.mortgagejake.com/blog. You can also follow Jake on Twitter @MortgageJake and like his Facebook page, I already did!