Sometimes, you find a home you want to live in, but you know it’s going to be a fixer-upper. Other times, you find your perfect lot, and decide to build from scratch. In both these scenarios, there are mortgages that can help you finance – at least in part – the renovation or building of a residential home. These are called “purchase plus improvements mortgages” and “construction mortgages” (the latter also being referred to as a “builder’s mortgage” or a “progress draw mortgage”).
Mortgages for renovations or building a house can apply to Metro Vancouver and B.C. residents, but with some caveats. It’s important to know what their limits are, and the likelihood that you’ll qualify for them. They can be complex to navigate through, since the banks won’t just hand out funds for DIY projects without a clear plan in place. Everything is documented, and even lawyers are involved.
That said, if you can qualify for them, they can pay off in a big way. They can increase the value of existing property (be it a house or a lot of land). And in some cases, they can motivate contractors to work before their typical payment schedules, since the lender funds are held by a trustworthy lawyer, not you. The lawyer is good for the money, because they can only pay the contractor with the amounts you’ve been approved for (or, they can reimburse you after you’ve paid those bills).
A good mortgage broker can help you apply for these mortgages in a way that is likely to get approval. They can also guide you through their intricacies, and be your voice when it comes time for negotiations.
Curious to know more? Get in touch with us today! We’ll find out how close you are to renovating or building your dream home!
Below, we’ll answer some common FAQs about purchase plus improvements and construction mortgages in B.C.
What’s the difference between a purchase plus improvements mortgage and a construction mortgage?
A purchase plus improvements mortgage allows you to add the cost of renovation into your home’s purchase. In essence, the bank can lend you an amount that would consider the finished renovation value of your home, instead of its pre-renovation value. There is more to know about this type of mortgage, and we’ll outline important details below.
A construction mortgage, or builder’s mortgage, is used to build a brand new home. These types of mortgages are based on “draws,” which is why they can also be referred to as “draw mortgages.” Certain percentages of funds are released for your project at intervals. Intervals are based on the amount of work that has been completed on your job site.
A construction mortgage is far more complicated than a purchase plus improvements mortgage. There are many more rules to coincide with. Plus, more funds are needed to cover up-front costs on your part. We’ll explain this program in more detail below.
How does a purchase plus improvements mortgage work?
To apply for a purchase plus improvements mortgage, you’ll need to start with a mortgage pre-approval, per the normal process. This will tell you what type of house you can afford to buy, both before and after it is renovated. In other words: your pre-approval amount will always include the cost of renovation. You can’t get more than that base amount.Read more
The difference here is that the lender will provide the cash to pay for renovations. This can be much cheaper than taking out a line of credit to do this. You’ll pay it all back as if your home was valued at its post-renovation price. Your interest rate and down payment percentages remain the same. This means less cash out of your pocket, and more put into the property that will inevitably increase its value over time, anyway.
To say it another way: your down payment percentage will include the renovation cash amount. That means that if your house cost is $500K, and your renovations come to $40K, you’ll pay as little as 5% down on $540K.
An important point here is that any home you mortgage this way must be occupied by you. It can have attached rental units (up to four), but you must live in at least one of the units. Renos can be done on any unit with the cash.
The next steps can be somewhat time-sensitive. So, you’ll need to work closely with your real estate agent, mortgage broker and contractor during these stages. They are:Step 1: find the house you want to buy
When you find the house you want to renovate, you’ll make an offer through your real estate agent, and wait to be accepted. At this point, you should have a very good idea of what it will cost to make repairs or changes to the property. You can ask a contractor for a rough, but realistic, initial quote.
After the seller agrees to your offer, the contractor will need to come to the house to provide an accurate, detailed quote, with a solid plan, for the work that needs to be done. This can’t be ‘willy nilly.’ It has to be professionally done, and written down, so the lender knows you are serious.
The renovation quote is then taken to your mortgage broker, who runs it by the lender (such as a bank). The lender takes a look at your plan, and decides whether or not to revise your mortgage, so that it includes your renovation costs.
When your lender agrees to revise the mortgage, it becomes a purchase plus improvements plan. The funds for your renovation are sent to your lawyer, where they are held until an inspection on the renovated house is passed.
In the meantime, you take possession of the house, and begin renovation work. Many contractors will ask for payment or deposits before the bank releases your approved funds. You can arrange to pay out-of-pocket with lines of credit, some savings or otherwise. Or, if you find a willing contractor, they may do this on the premise of being paid by the lawyer when all is said and done.
No matter who is put on hold for payment, they won’t be waiting long; these renovations have deadlines associated with them. They typically must be completed within 90 to 180 days.
Don’t forget; you’ll be a homeowner at this point, paying your regular, monthly mortgage bills, based on your total borrowed amount. Also, in most cases, mortgage insurance will still apply, on top of your mortgage fee, even under this program. You’ll need to factor these details into your budget, especially when considering your contractor’s payment schedules.
You notify your mortgage broker or lender that the renovation on the house has been completed. The lender will send their own appraiser or inspector to check that everything has been done to spec.
When the lender’s requirements are satisfied, they will advise your lawyer to release the funds. Moneys can be used to pay your contractor, or to reimburse you for the fees you already paid towards the project.
From here on out, you pay your monthly mortgage payments as planned, and enjoy your new, picture-perfect home!
How much can I get for a renovation with a purchase plus improvements mortgage?
The renovation costs on your property can’t exceed more than 20% of the purchase value of the home. However, it’s rare to get 20%, and most people get 10%, or a limited cap. A good mortgage broker can help you get higher approvals.
Generally, most people are given a $40K allowance for renovations.
To find out how much you can likely get, we recommend speaking with a mortgage broker, who can look more closely at your case.
How do construction mortgages work?
When you buy a pre-built home, you are essentially borrowing money from a lender to pay for most of it upfront. This is a traditional mortgage (in simplified terms).
With a construction mortgage, the upfront amount you borrow is not to buy a pre-built home; it is to pay for the construction of a future home. Since the home does not yet exist, you are lent cash funds to create it, based on the premise that it will be worth something of tangible value, in due time.Read more
In either scenario, you pay the lender back for something. A construction mortgage simply makes it possible to take out a large loan so you can build your dream house.
Now, this can sound too good to be true. In a way, it is. This type of scenario works well for those who are experienced at home building projects, or who have the resources to hire someone who is.
The mortgage application will require documentation on several stages of your project, before they begin. Everything from land surveys to obtaining an occupancy certificate must be planned in advance. That includes utility connections, road access, foundations, roofing, electrical fittings, drywall, paint and the whole shebang.
Timelines matter a lot, too; lenders want to know that their money is being used wisely, and for profit. In a positive way, this will keep you diligent to stay on schedule. But if you can’t, for whatever reason, you’ll end up ‘in a pickle.’Moreover, the following considerations should be taken into account:
- Most approved projects are based on homes that can easily be re-sold, in case things ‘go south.’ That means typical-looking, reasonable-sized homes with rental units, near a city. If you want to build an underground bunker 5 hours from the nearest international airport, you probably won’t get approved for this type of mortgage. That’s an extreme example but, you get the idea. Off-grid cabins in the wild, or houses on 10-acre farms probably won’t fly either.
- Draw allowances are contingent on work being completed. They are not available for work-to-be-done.
- Further to the above, you’ll need cash to pay for contractors and supplies before the lender releases funds via your lawyer, per your agreed-upon schedule of draws. The contractor needs to agree to a similar schedule ahead of time. The lender will check to see that your payment schedule with the contractor doesn’t veer too far off from your draw schedule. They’ll also want proof that you have access to sufficient cash to keep the project moving until draws are released, or in case you go over-budget.
- The builder must be part of a New Home Warranty Program (where your project will be registered). They must be able to build according to the National Building Code of Canada. It goes without saying they should be licensed contractors, too.
- You can act as the builder, if you can prove you have the knowledge and skill to do it. However, even if you do, this will take up a considerable amount of time and energy on your part, which may not be viable. Of course, the quality of your build must meet all the above standards.
- In some cases, you can buy the lot, and present the title deed to the lender. In other cases, the contractor will own the lot, and agree to pass it to you after they are paid in full. You’ll need to make an official purchase offer to show the lender that this is your plan.
- Blueprints, design plans and building permits should be ready-to-go for your mortgage approval. You’ll need to pay for this out-of-pocket.
- Inspections will be needed to verify each stage of completion, before draws are released. Most of the time, these services will need to be paid for by you.
- Some construction mortgages will only release funds after full completion, and not in stages. These types of mortgages are more common.
- Funds held by your lawyer, from your lender, will always withhold a 10% builder’s lien. This is in case you owe your builder for any outstanding bills at the end of your project. It is required by law.
- If your project goes over-budget, and you don’t pay your builder, they can file a builder’s lien against your home. So, it is critical to avoid going over-budget.
- You won’t be able to adjust your mortgage for home upgrades, once it is approved. There may be other means of obtaining funds, if it turns out you do want to make changes that will go over budget. Your mortgage broker can help you investigate your options.
15% – used towards excavating the land and completing the foundation. This is optional, for insured mortgages only.
25% – used towards roofing and weather protection. The home should be about 40% complete, airtight and secured.
25% – used towards plumbing, electrical wiring, drywall, furnace installation, exterior wall cladding, etc. The home should be 65% complete.
20% – used towards kitchen cupboard installation, bathroom completion, door hanging, tile and floor laying, painting etc. The home should be 85% complete.
15% – used towards all other work on the home, such as exterior and seasonal work. The home should be 100% complete, and ready for occupancy.
How much can I get to build my own home with a construction mortgage?
The amount you can borrow to build a home with a construction mortgage will depend on several factors that are unique to you. It is a lot like applying for a so-called, ‘regular’ mortgage. The lender will look at how reliable you will be as a borrower. You should have a down payment ready, a stable job with sufficient income to pay for your project, a good credit score, and more.Read more
Each lender will have their own criteria for evaluating your case. Not many lenders will take on this type of mortgage, since it involves a lot of risk. Experienced mortgage brokers can help you find them, however.
A mortgage broker can also assist you in gathering the materials needed to document your eligibility for this type of program.
Your ‘forever home’ may be hard to find, but you can create it with the right mortgage broker at your side
While a purchase plus improvements mortgage or construction mortgage in Vancouver can feel like a complex maze to get through, it doesn’t have to be. Mortgage brokers are trained to figure out all the equations, and put the puzzle pieces together for you. They can work with your lender and real estate agent directly, while giving you tips on how to communicate with your contractor.
Before you go down a rabbit hole of confusion, mortgage professionals can tell you whether you’re likely to approve for a renovation mortgage or builder’s mortgage in B.C.. They can also prepare your application, making it more appealing to lenders by highlighting your strengths.
And, if your application is rejected with one lender, that doesn’t mean all hope is lost. Independent, Metro Vancouver mortgage brokers can search the ‘hidden’ market to find you a lender that is more likely to approve your plans.
There’s no need to wait for your ‘forever home’! You can create it! Start by giving us a call, and we’ll explain what’s next.