Mortgage Blog

Purchase Plus Improvements Mortgages in Ontario

November 24, 2024 | Posted by: Michael Croitoru

Have you ever wondered how to buy a house that requires upgrades when you only have the capital to support the required down payment and closing costs? We have compiled all the information needed to master the 'purchase plus improvements' mortgage.

In Ontario, a 'purchase plus improvements' arrangement typically refers to a real estate purchase agreement where a buyer agrees to buy a property and also plans to make improvements or renovations after the purchase. This concept can apply to residential, commercial, or industrial properties and often comes with specific financing considerations. Buyers usually have a vision for how they intend to improve the property. This could include renovations, upgrades, or expansions. It's crucial to have a detailed plan, including costs, timelines, and permits required for the improvements.

The mortgage process for a 'purchase plus improvements' arrangement involves several steps that combine both the acquisition of the property and the financing of the planned renovations. Here’s a detailed overview of the mortgage process involved:

1. Pre-approval for a mortgage: Before house hunting, buyers should evaluate their financial health, including credit score, income, debts, and savings. Obtain pre-approval from a lender to understand how much you can afford, including both the purchase price and expected improvement costs. This involves submitting financial documents to your mortgage professional. It is always a good practice to research lenders who offer this product.

2. Home Search: Find a suitable property that will fit your needs and budget, considering potential improvements. Evaluate property value and ensure the property has potential for value enhancement through renovations.

3. Purchasing Agreement: Once a property is selected, negotiate the purchase agreement with the seller and be sure to Include the Improvement costs. The agreement should specify the intended improvements and an overall budget for the renovations.

4. Property Appraisal: The lender will typically require an appraisal to determine the current market value of the property. This assessment may also include an estimate of post-renovation value if improvements are substantial. The loan amount will often be based on the property's purchase price plus the estimated cost of improvements, ensuring it does not exceed a certain percentage of the property's expected value afterward.

5. Approval and Conditions: If approved, you will receive a mortgage agreement detailing the terms, interest rates, and any conditions related to the renovations. Satisfy any conditions prior to closing such as providing further documentation or completing inspections.

6. Closing the Purchase: At the closing meeting with your lawyer, funds are exchanged, and ownership is transferred. The lender releases the mortgage funds to close the purchase, generally covering the purchase price first, with renovation funds held in a separate account.

7. Renovations & Completed Improvements: Once you own the property, renovations can begin. Often, the funds for the improvements are released in stages as work is completed. You may need to submit drawing requests to the lender along with evidence of completed work to access the renovation funds.

All renovations must comply with local building codes and zoning regulations. It’s advisable to check with the municipality in where the property is located to ensure that all improvements meet the necessary legal requirements. Setting a timeline for when the renovations will take place, and coordinating with contractors or builders is essential for staying on schedule.

8. Post-Renovation Appraisal: After renovations are completed, a follow-up appraisal might be required to assess the increase in property value.
Well-planned improvements can significantly enhance the property's value and buyers can tailor the space to fit their needs.

This approach can make home-buying more strategic, allowing buyers to secure properties that may be undervalued but have great potential with the right improvements.

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