Budgeting Renovations
By Frank O'Brien with Peter Kinch

Innovative financing allows homeowners to tap into more of their home's equity.

Renovators can help homeowners find the funding for substantial renovations by explaining some innovative financing programs, according to mortgage brokers Peter Kinch of the Mortgage Centre, which has offices across Canada.
One of the things that most people are not aware of is that the chartered banks in Canada cannot lend a homeowner 75 per cent of the value of the house without having it insured. This insurance can only be provided by one of two companies: Canada Mortgage and Housing Corporation (CMHC), which is a Crown Corporation, or GE Mortgage Insurance Canada, a division of GE Capital. This is referred to as high-ratio insurance and premiums are paid on the total amount of the mortgage when it is insured. Most Canadians never question the premiums paid on the purchase when buying their homes, but they should when re-financing. Since the premium is charged on a sliding scale that ranges from 1 to 3.25 per cent, the amount of money you take out can affect the cost of borrowing that money.
Here's an example: Say your client's home is worth $100,000 and has a mortgage of $65,000. This would mean the mortgage is 65 per cent of the value of your home, or as the bank would say, 65 per cent Loan to Value (LTV). That would allow the owner to borrow up to $10,000, or 75 per cent LTV, and not have to pay any insurance premiums. This is also the maximum the lender would allow the owner to take out in the form of a Line of Credit (LOC) since most lenders will only allow a LOC up to 75 per cent of the value of a home. In some cases, a LOC is the best way to go about financing a home renovation as it can be simply registered as a second mortgage behind the existing first one and you can leave your first mortgage in place.
If, however, the owner needs to access more than 75 per cent of the value of the house, he or she could borrow up to 90 per cent of the home value and pay an insurance premium on the total loan amount. In this example, a new mortgage of $90,000 would put an additional $25,000 into the homeowner's hands to renovate accordingly. However, doing it this way would cost that borrower a 2 per cent insurance premium, or $1,800.

Tapping equity
An alternative way of doing this, which could end up saving money, is a little-known and under-used product that most lenders offer and that is a Purchase Plus Improvements Loan. This product is more commonly used when buying a house wherein improvements are necessary that will add value to the house, but it can also be applied for renovations. The key is that the renovations are expected to add value to the house.
Let's suppose that the couple owning this $100,000 house wanted to do the same $25,000 renovation and that reno was expected to add about $20,000 to the value of their house. This would then make the post-renovated value $120,000. What most borrowers are unaware of is that lenders can provide that loan based on a post-renovated value. The additional $25,000 on to their existing $65,000 mortgage would, as in the previous example, make the new mortgage $90,000. This is only 75 per cent of $120,000 and therefore no insurance premium would apply. The couple would save the $1,800.
The process is simple. First the owner determines the value of the house today before renovating and then determine how much it's going to cost to do the renovations. An appraiser then comes in and appraises the house "as is" and "post-renovated". The owner will have two values that are then given to the bank. The bank will provide a mortgage based on the post-renovated value, but since they have no guarantee that you will actually do the work, they won't lend an amount that equates to over 100 per cent of the value.
The bank will do what's called a "cash holdback". This holdback will be held either by the bank or in trust by the owner's lawyer until the renovations are complete. Upon completion of the renovations, the owner then has the appraiser return to the property to inspect what was done and ensure that the renovations actually added to the value. Once this is established the holdback is released.
With a bit of innovation, according to Kinch, it is possible for homeowners to tap into a lot more money for substantial renovations. HB