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Lower down payments, renovation loans easier than ever
Many of us have fond childhood memories of dad loading up the station wagon heading out for a summer long weekend. For some the destination was a lakeside campsite, but for a lucky minority it was the summer cottage by the lake.
But unless you were fortunate enough to inherit dad‘s cabin, the thought of buying your own piece of recreational paradise can be a daunting task for most young families.
This spring, however, Canadian
Mortgage and Housing Corporation (CMHC) came out with a new program that provides Homeowner Mortgage Loan Insurance for borrowers with more than one residential property. This means that you can now get a CMHC-insured mortgage on a vacation property with as little as five per cent down.
Traditionally, lenders would require borrowers to put more money down on vacation home, usually 35 per cent or more. Even popular destinations such as Whistler required a minimum of 25 per cent down payment.
The CMHC change is therefore welcome news for those who have been longing to get a vacation property but didn‘t want to wait until retirement to come up with the down payment.
The purpose of this insurance product is to make it more feasible for Canadians to get a second home. It is important to distinguish between a second home and a rental property. This product is not intended to allow an investor to get a rental property with five per cent down.
Renovating the cottage
So imagine you found a great cottage to buy and you qualified for the financing with five per cent down, only to find out that the property is in need of some renovations. Did you know that these repairs can now be financed through CMHC‘s Purchase Plus Improvements program? This product is probably the most under-used and least understood program that CMHC offers. In a nutshell, you can take the cost of fixing up a vacation home and get financing for the purchase based on the completed value not the sales price. Let‘s look at a simple example:
Suppose someone was looking to purchase a cabin on the lake that was suitable for year-round access and the purchase price was $100,000. But the cabin needed a little TLC and repairs to the tune of $15,000. An appraisal would be ordered and the appraiser would be asked to provide two separate dollar values. One would be to confirm the value of the property as-is ($100,000) and the second would be to determine the value of the property upon completion of the improvements. If, for example, the value upon completion in our example added $15,000 to the value of the home, a first mortgage could be arranged for 95 per cent of the “as-improved“ value, not 95 per cent of the purchase price. In this case that would be a first mortgage of $109,250, even though the purchase price was only $1oo,ooo.
There‘s no catch to this, but there is
a condition. The lender will not advance the full $109,250 up front. They will not want to take the chance that the money has been advanced for the purpose of
renovations and the renovations don‘t get done. In the event that this happened, the lender would then have a mortgage on the property for in excess of the value of the
home. To get around this, the lender will advance 95 per cent of the purchase price at closing ($95,000 in this case) and ask the lawyer to hold the balance in trust. It would then be up to the borrower to secure their own source of funds to complete the renovations. Home Hardware, for instance, will typically grant clients a line of credit or Visa card to pay for these costs with a 3o-day grace period. Once the work is complete on the cottage, the appraiser will then re-inspect the property to ensure that the work has been done according to the specifications previously outlined. The appraiser will then confirm that the property’s value has indeed increased as expected. Upon receipt of this report, the lender would then release the funds to the borrower that were being held back in the trust account. The net benefit to the borrower is that they were able to include the cost of their improvements into the financing of the property.
With a little help from these new products maybe you can help create some great childhood memories for your kids.
Peter Kinch is the senior mortgage consultant and owner at The Mortgage Centre – Canadian Mortgage Team and is the author of “The Mortgage Minute“ heard daily on News 1130 at 5:36 p.m. He can
be reached at 1-866-988-8326, www.peterkinch.com or [email protected]
