Many buyers find themselves choosing between an affordable home that needs work and a move-in-ready property that costs more than they want to spend. A purchase plus improvements mortgage allows eligible buyers to include renovation costs in the mortgage used to buy the home instead of relying on separate home improvement financing. The lender evaluates both the property’s current value and its estimated value after the work is completed before determining how much can be borrowed.
Key Takeaways
- A purchase plus improvements mortgage allows buyers to roll approved renovation costs into the mortgage used to purchase the home instead of relying on separate financing.
- Lenders consider both the home’s current value and its estimated value after the renovations are completed when determining how much you can borrow.
- Renovation funds are usually released after the work has been completed and inspected, so buyers should be prepared to cover some expenses upfront.
- Renovations that improve a home’s functionality, efficiency, safety, or long-term value are generally more likely to be approved than highly customized or luxury upgrades.
How the Financing Works
The Property Is Valued Twice
Purchase plus improvements mortgages require lenders to assess both the property’s current value and its estimated value after the planned work has been completed. Depending on the lender, this assessment may involve separate appraisals or a single appraisal that includes both values. The projected value helps determine the loan-to-value ratio and the required down payment.
Lenders generally prefer improvements that add lasting value to the property, such as a new kitchen, updated windows, a replacement roof, or major plumbing and electrical work. REMAX agents often find that buyers focus on the appearance of a home, while appraisers pay closer attention to upgrades that improve the property’s long-term value. Features such as hot tubs and custom entertainment spaces may not qualify.
The Renovation Money Is Released After the Work Is Completed
Buyers don’t receive the renovation funds at closing. Instead, the funds are typically held back and released after the work has been completed and inspected. This means the buyer or contractor must usually cover renovation costs upfront. Cost overruns are also the buyer’s responsibility because the holdback amount is based on the original estimates submitted to the lender.
The Down Payment Is Based on the Improved Value
For insured mortgages, minimum down payment requirements generally follow the same rules that apply to other insured loans. Buyers purchasing a one- or two-unit property must provide a minimum down payment of 5 per cent on the first $500,000 of the home’s value and 10 per cent on the remaining balance, while buyers purchasing a three- or four-unit property typically need a minimum down payment of 10 per cent.
For a purchase plus improvements mortgage, lenders generally calculate the required down payment using the lower of the total purchase price, including approved renovation costs, or the home’s estimated value after the work has been completed. Insured mortgages must also remain within the applicable lending limits.
Single Advances and Progress Advances
Lenders generally release funds in a single payment when renovation costs account for 10 percent or less of the property’s estimated value after the work has been completed. Larger projects are commonly funded through progress advances, with money released at predetermined stages of construction. The 10 percent threshold is sometimes described as a borrowing limit, but it actually refers to how and when the funds are released. Other insurers and lenders may apply different requirements.
What Can Be Financed and How Much?
Purchase plus improvements mortgages are arranged through lenders, but mortgage default insurers often play an important role behind the scenes. In Canada, the three primary providers are the Canada Mortgage and Housing Corporation (CMHC), Sagen, and Canada Guaranty. Their guidelines help determine borrowing limits, eligible renovations, appraisal requirements, and how renovation funds are released.
These organizations are not involved in every transaction. Whether mortgage insurance is required depends on the size of the down payment, the purchase price of the home, and the lender’s requirements. Buyers who make a down payment of 20 percent or more may qualify for conventional financing, in which case the lender’s own policies generally determine how the renovations are handled.
Private mortgage insurers: Insurers such as Sagen and Canada Guaranty offer purchase plus improvements programs for eligible borrowers. Maximum financing, eligible improvements, documentation requirements, and how funds are advanced vary by insurer and lender.
CMHC Improvement: CMHC also offers financing based on the property’s as-improved value. The program provides different advance options depending on the size and nature of the project, with lender and CMHC requirements determining how the funds are released.
Regardless of the program, lenders will review factors such as income, debt service ratios, credit history, and whether borrowers have enough flexibility in their budget to absorb unexpected costs.
How to Improve Your Chances of Approval
Have Your Renovation Plans Ready
One of the biggest misconceptions about purchase plus improvements financing is that the renovation details can be finalized after closing. Lenders typically want to see contractor estimates, timelines, and details about the work before approving the mortgage. This is because the lender isn’t simply evaluating the home’s current value. They’re also considering what the property could be worth after the renovations are complete. The more detailed your plans are, the easier it will be to assess the project.
Focus on Improvements That Add Value
Lenders generally prefer renovations that improve a home’s functionality, safety, efficiency, or long-term value. Kitchens, bathrooms, windows, roofing, plumbing, electrical upgrades, and heating and cooling systems are among the projects most commonly approved. On the other hand, highly customized features, luxury additions, and purely cosmetic upgrades may be more difficult to finance because they do not always increase the property’s appraised value.
Prepare for Costs That Fall Outside the Mortgage
Many buyers assume that every expense associated with the renovation can be rolled into the mortgage, but that is not always the case. Permit fees, unexpected repairs, and upgrades that exceed the original estimate may have to be paid separately. You should also remember that some lenders release renovation funds only after the work has been completed and inspected. Having additional funds available can help keep the project on schedule.
Keep Your Finances Stable During the Approval Process
As with any mortgage application, lenders will review your income, debt levels, credit history, and down payment before making a decision. Avoiding large purchases, taking on additional debt, or changing jobs while the application is being reviewed may improve your chances of approval. Lenders are also looking for evidence that you can comfortably manage both the mortgage and the renovation costs if unexpected expenses arise.
Alternatives to Consider
A purchase plus improvements mortgage is designed for buyers who want to purchase a home and complete renovations shortly after closing. Depending on the size of the project, the amount of flexibility required, and the buyer’s financial situation, another type of financing may be a better fit.
- Home equity line of credit (HELOC) or unsecured loan: A HELOC or unsecured loan may be a better option for homeowners who already own their property or buyers who need greater flexibility. Unlike a purchase plus improvements mortgage, these products typically do not require detailed contractor estimates, appraisals, or staged fund releases. The trade-off is that interest rates are usually higher.
- Construction mortgage: Buyers planning a tear-down, major structural renovation, or a new build may need a construction mortgage instead. Also known as a construction loan in Ontario, this type of financing releases funds in stages as the work progresses rather than providing a single lump sum at closing.
Frequently Asked Questions
Can you add renovation costs to a mortgage in Canada?
Usually not. A purchase plus improvements mortgage is intended for buyers who are purchasing a home and renovating it immediately after closing. Existing homeowners will typically need to consider alternatives such as refinancing, a home equity line of credit (HELOC), or another form of home improvement financing. The timing is important because lenders need to establish both the property’s current value and its estimated value after the work is completed. Once the mortgage has already closed, that process becomes much more complicated, which is why this type of financing is generally arranged as part of the purchase itself.
Can you do the work yourself?
That depends on the lender and the type of renovation involved. Some lenders allow homeowners to complete portions of the work themselves, while others require licensed contractors, particularly when electrical, plumbing, structural, or heating systems are involved. Even when do-it-yourself projects are permitted, lenders may reimburse only the cost of materials rather than the value of your labour. Work completed by licensed professionals may be easier to document and verify because permits, inspections, warranties, and building code requirements are often involved.
Is a purchase plus improvements mortgage the same as a construction mortgage?
No. A purchase plus improvements mortgage is generally used to buy an existing home and finance approved improvements as part of the purchase. A construction mortgage is designed for projects such as a new build or major construction and typically releases funds in stages as work progresses. Some mortgage-insurance programs, including CMHC Improvement, can accommodate new construction under separate requirements, so buyers should confirm which financing structure applies to their project.
Buying a home that needs work can be one of the most affordable ways to enter a competitive market. A purchase plus improvements mortgage can help, but preparation matters. Having contractor estimates, renovation plans, and some additional savings in place before making an offer can make the process much smoother. Looking at a fixer-upper? A REMAX agent can help you assess the property’s potential and connect you with the right professionals.
