Ok guys. It’s that time. In the spirit of keepin it real, we’ve decided to address the screaming purple elephant in the room because frankly, a lot of people are
nosy curious. Seriously, we’ve had neighbours see our house going up & do everything from dance around the issue, to flat out ask what we do & how much we make! So today we’re talking about money.
Up to this point we’ve been a bit hesitant to touch on the subject because it tends to be one of those hot-button issues that is hard wired to people’s emotions & a lot of the time is the cause of judgement. That said, we think its an important part of our journey that warrants shedding some light on a few of the misconceptions and helping people understand that it is possible to undertake large scale renovations on middle-class salaries.
On a side note – last week marked one year since we closed on the purchase of our house. So we thought it a fitting opportunity to take you visually back through some of the milestones of our reno up to this point, while we speak to how we’ve been able to make it all happen. So here goes…grab a
coffee glass of wine – cause this is gonna be a long one…
A Different School of Thought
If you remember one of our early posts on seeing the potential, you’ll remember that we went into this whole process with a different mentality than your typical home buyer. In essence, we weren’t really looking to find a “Dreamhouse” as is, we were looking for a property with the potential to become one. For us, that potential translated into a few key factors:
When choosing the right location for our Dreamhouse we knew the most important attribute would be its ability to support the value of a renovation like ours. Our ideal goal was to find a neighborhood ‘in-transition’ where we’d still be able to find an older, affordable home, situated among larger, higher-valued custom builds. Basically, we didn’t want the finished value of our home to be out of proportion with the rest of the area.
- Lot size
As much as we love the urban city feel, let’s face it, we’re children of the suburbs. We like the bigger backyards, and larger square footages that come with suburb life. Problem being, lot sizes in newer suburban developments are getting smaller & smaller, so it was clear to us that finding a property where we could have a large outdoor living space was really only going to be possible in a mature neighbourhood.
Because we knew we wanted to create a home that is uniquely ours & designed specifically to fit our family & lifestyle, it didn’t make sense looking for a house that someone else had already sunk money into. We needed a fixer-upper. A blank slate.
Of course it always comes back to money doesn’t it? We’d attained mortgage pre-approval at the bank, which ultimately set our total budget. From there we worked with Kevin to get an approximate cost for the build, which meant that by doing a little basic math we could figure out our ceiling price for the purchase of the property. Basically, we knew we had to find a house that hit all of the points mentioned above, AND that was valued low enough to leave headroom in our budget for the renovation costs. However, after reading this article, I found out that it’s possible to build credit by getting a credit card. This is good to keep in mind, just in case we go over budget. If we do, we can just apply for a loan, especially once our credit score is healthy again.
A heavy task? Yup. But we like a challenge – also – we might be a little crazy.
“We AIN’T rich bi@tch!!”
Ok, so let’s dispel the first misconception…we aren’t rich. Not even close. We’re not operating on any kind of trust fund, or lottery winnings. We’re not sitting on dot com money. We both work full time jobs & get kicked in the face with taxes. We’re average, middle-class Canadians. So how is it that we’re able to afford such a large scale renovation on average, middle-class Canadian salaries??
Enter the CMHC Improvement (formerly Purchase Plus Improvements) Program
There’s a little known program offered by the Canada Mortgage and Housing Corporation (CMHC) that allows you to obtain an insured mortgage loan to cover the purchase price of a home plus an amount to pay for immediate renovations or improvements. The catch – because you know, there’s always a catch – is that the renovations can’t just be cosmetic. To be eligible for the CMCH Improvment Program, the renovation must be a permanent fixture that adds value to the property, so a coat of paint & some new appliances, for example, don’t qualify. A broken furnace wouldn’t qualify either, since fixing it isn’t something that would add value to the property. Also, you literally need to have all your ducks in a row in order apply. Things like:
- Appraisal of current market value for the property being purchased
- Detailed plans for the proposed renovation
- Cost estimates or quotes from a licensed professional willing to undertake the work involved
- Qualifications for financing through an approved lender to obtain a CMHC insured loan
- Proof of available funds to make the down payment (minimum 5% of the total post-renovation value of the house)
A little pretend math…
Ok…so let’s break down how this thing works with some simple numbers…
Let’s say you find a house in your ideal neighbourhood for $200,000, but it’s in need of some major TLC . You know that upgraded houses of similar size, in that area could easily sell for $350,000 or more. So you do your homework and (along with some professional insight) come up with a $100,000 renovation plan to knock down some walls, create a beautiful open concept layout & add on some square footage for that big beautiful kitchen you’ve always wanted. Maybe you even decide to add on a 2nd level. You then go to the bank & say “Hey, I want to buy & renovate this house for $300,000. Here’s all the info on how I’d do it.” The bank (assuming you’ve got a respectable credit rating) provides you with mortgage pre-approval & then calls CMHC who look over all the info & decide that when all is said & done your house will be worth at least the $300,000. So CMHC says, “That sounds like a good investment” & the bank says “YEA — let’s do this ish!” (Ok, maybe it doesn’t go exactly like that, but you get the idea.)
So you buy the house, having put down $15,000 (or 5% of the $300,000) & now you’re a new homeowner. The purchase price and the renovation costs all get rolled into one mortgage and instead of having, say an $800 mortgage payment, your payment is more like $1,000. Awesome. But how do you actually get the money to pay for the renovations??
The joy of progress draws…
Now, the way CMHC Improvement works, if the increase to the market value of the property is more than 10% of the ‘as-improved’ market value, then CMHC will validate and authorize up to 4 advances of the loan based on your ‘progress’ or percentage of completion – we call these advances ‘draws’.
So back to our pretend math…
$200,000 (purchase price & current market value) + $100,000 (reno costs) = $300,000 (as-improved value)
$100,000 (increase in value)
$30,000 (10% of as-improved value)
In our example, the increase in market value exceeds the 10% so your total mortgage amount would be broken up and advanced to you at various stages throughout the renovation process.
Let me make it clear that this type of loan program is no walk in the park. There are definitely a few major challenges.
The first thing you need to remember about progress draws is that of the 4 draws you’re allowed, the purchase price of the house counts as the first one. Which means that in reality, you only have 3 draws. That may not seem like a big deal, but when you’re talking about a major renovation and each draw amount is assessed, calculated & advanced based on the how much progress you’ve made in the renovation, you had better be damn sure you’ve got the funds available to carry your project to that second draw! Thankfully in our case we were able to put the funds together by scraping up every last bit of savings, drawing from our line of credit, and even having parents willing to kick in a little extra when the spare change in our pockets started to turn to lint.
Another thing to remember is because the funds are advanced in stages, things tend to move slooow. Before each draw is advanced, an inspection, appraisal & assessment of percentage complete need to take place. If you’re dealing with a contractor, you’ll need someone who is able to be paid in instalments throughout the project. And a lot of the times, those instalments arrive more slowly than either of you would like. Also, because there are no hard and fast rules as to what stage of progress translates to what percentage of completion, it’s nearly impossible to estimate how much each draw amount will be. Which leads to cycle after cycle of, Stop. Assess. Plan. Continue. And it wreaks havoc on your nerves. HAVOC.
Despite the drawbacks, the stress and at times the feelings of uncertainty, the CMHC Improvement Program is ultimately what is making our Dreamhouse Project a financial possibility. We found a house that was worth nearly half of what it’s renovated counterparts in the area were going for. So we went to the bank, applied to the program and were able to secure a mortgage that included the purchase price plus the amount to cover the cost of our renovations. It’s really the only way we could take on such a large scale renovation. When all is said and done, we’ll have a house that is 100% custom designed and built just for us. And the cost of it is all rolled into one mortgage and amortized over 25 years – no different than if we had found and purchased a renovated home. At the end of the day, if you’re willing to take on the challenges, loan programs like ours can be an excellent option for people who like us who aren’t working with a huge nest egg, but who have lofty dreams, and just enough crazy to go after them!
To learn more about CMHC & the Improvement program contact a mortgage professional or call 1-888 GO emili.
**We have no professional affiliation with CMHC and were in no way compensated for this post. All opinions are our own.**