Imagine finding the perfect home—almost. It has great potential, but needs a few updates to make it yours. Maybe the kitchen needs a refresh, or a finished basement is a must-have. A purchase plus improvements mortgage can be a great solution, allowing you to buy a home that's more affordable upfront and customize it—often for less than the cost of buying a brand new house.

What is a purchase plus improvements mortgage?

A purchase plus improvements mortgage is a unique financing option that allows you to bundle the cost of home renovations into your mortgage, simplifying the process of buying and upgrading a property. Unlike traditional mortgages that only cover the purchase price, this program considers the post-renovation value of your home. This means you can borrow more upfront to transform your new house into your dream home.

How does a purchase plus improvements mortgage work?

Get quotes

Obtain detailed quotes from licensed contractors outlining the scope of your planned renovations. These quotes will be reviewed by your lender to confirm that the proposed improvements will enhance the property's value.

Receive purchase funding

Upon closing on your new home, the "purchase" portion of your mortgage is released, allowing you to take ownership.

Receive renovation funding

As your renovation project progresses, your lender will do inspections at predetermined stages to confirm that the work aligns with the approved quotes. Once the work is approved, funds are released to pay your contractors. Depending on the scale of your renovation, you could receive your funds in installments or as a lump sum.

What are the requirements for a purchase plus improvements mortgage?

• To qualify for a purchase plus improvements mortgage, you have to be approved for the total loan amount, including the renovation costs. 
• Your proposed renos must increase the value of the home.
• If you’re planning on building a legal basement suite, your lender could consider the potential rental income to help you qualify.
• The minimum downpayment you’d need is based on the final value—so purchase price plus cost of improvements.
• You have to get third-party quotes for renovations, even if you plan on doing some of the work yourself. They will need to be approved by your lender, and possibly the mortgage insurer—sometimes an appraisal is needed. Items that aren’t permanently attached to the property, like detachable appliances, aren’t eligible for financing.
• If you’re planning a larger reno, your lender may need to see blueprints, floorplans, specs and a build contract with a contractor. 
• You also need to have the funds to cover some of the initial renovation expenses, since you’ll receive the financing after the work is completed and verified.
• Plan on starting your renovations as soon as you get possession of your new home. Lenders put a limit on when your renovations need to be completed, anywhere from 90 to 180 days.

What are the pros and cons of a purchase plus improvements mortgage?

Pros

Lower interest rates: Finance your renovations at your mortgage rate, which is typically much lower than rates for unsecured loans or credit cards.

Preserves savings: Renovations tend to be expensive. By financing your home improvement, you’re allowing yourself to continue to save and potentially grow your wealth. Determining if additional financing would be advantageous can be challenging. However, there are tools available to help you make the best decision. 

Increased borrowing power: Access more funds than a traditional mortgage would provide by leveraging the projected post-renovation value of your home.

Customization: You can purchase a home that's almost perfect and use the additional funds to make it exactly what you want.

Affordability: By making a few renos, you could take a home with a lower purchase price and transform it into a space you love, for less than a home requiring no work. 

Cons

Upfront costs: You would need cash or credit to cover initial renovation expenses—such as contractor deposits—before the lender releases the funds.

Strict adherence to plans: The completed renovations must match the approved quotes. Deviating from the plan could cause your lender to withhold funds for unapproved changes.

What are other ways to finance a home renovation?

• Cash: If you have money saved or invested, you could put it towards your home improvements, allowing you to avoid interest costs and loan restrictions. However, this has the potential to drain your financial reserves or set back your long-term investments. 
• Unsecured financing: Personal loans, lines of credit or credit cards offer flexibility. However, interest rates are typically higher than mortgage rates, and heavy use can impact your credit score.
• HELOC: If you’re a home owner already, a home equity line of credit (HELOC) could be an option. You would have access to a set amount of money that you can use as needed for your renovations, while only being charged interest on the amount used. HELOCs usually have lower interest rates than unsecured financing, and these rates are often variable and float with Prime.

Why should you use a purchase plus improvements mortgage instead of a traditional mortgage and separate secured secondary mortgage loan?

A second mortgage loan often carries a slightly higher interest rate. That’s because it's considered a refinance rather than a purchase.

If you have an insured mortgage (with a down payment below 20%), you cannot take out additional financing secured against the home until the mortgage balance is below 80% of the property value, unless your renovation is the addition of a legal secondary suite. In that case, or if you're looking to finance other renovations, a purchase plus improvements mortgage may be your only option.

What are the costs involved in a purchase plus improvements mortgage?

• Appraisal. This may not be required, depending on your mortgage and the extent of your renovations. The cost of the appraisal will vary depending on your property’s location.
• Inspection fees. A flat fee is taken from the first renovation advance to cover all required inspections. The cost depends on the size of the project and number of inspections needed.
• Lawyer's fees. While lawyer's fees are already part of the purchase process, there can be additional fees. The lawyer requests funds at each renovation stage and acts as the mediator for fund advancements.

Applying for a mortgage

To learn more about mortgages and buying a home in Alberta, check out our comprehensive guide. If you’re looking for personalized guidance, our mortgage specialists can equip you to navigate the home buying journey, your way.