In previous posts (links shared below) we have discussed in detail both refinances and purchase plus improvement mortgages. Both of which are tools that can help either a current home owner (refinance) or a home purchaser (Purchase Plus Improvements) structure the mortgage in a such a way which allows the client to roll the cost of improvements into the home.
This post is going to take the idea of refinancing to access equity for home improvements one step further…Introducing the Refinance Plus Improvements Mortgage. Similar to the Purchase Plus Improvements Mortgage, it allows you to access more money for home renovations which increase the value of the home. The refinance is based on the future (or post improvement) value of your home. Basing the refinancing on the future value of the property allows the borrower to access additional funds compared to a standard refinance.
Let’s take a closer look at how a Refinance Plus Improvements mortgage can get you the extra cash you need to get your renovations completed.
The Standard Refinance
An everyday refinance allows the home owner to access up to 80% of the fair market value of the home. The value is typically determined by a Market Appraisal on the home. Here is how it would look:
- Current Appraised Value of the home: $250,000.00
- Max New Mortgage Amount: $200,000.00 ß 80% of present value
- Your current Mortgage Balance: $190,000
- Equity Available to you for the renovations: $10,000.00
*Note: some of the equity will cover closing costs (it is a new mortgage after all, so a new registration and fund advance needs to happen. If you are breaking a current mortgage, there could be a pre-payment penalty as well)
The remaining equity can be used towards your improvements. But what happens if it’s not enough to cover the improvement costs? You’re now stuck with either making sacrifices to your dream reno, covering the additional costs out of pockets, use a higher interest line of credit or not doing the renovations at all. None of which are a great options.
The Refinance Plus Improvements Mortgage
Here is how the Refinance Plus Improvements mortgage can make all the difference.
For argument sake, let’s assume for a moment that the home owner is thinking about renovating their kitchen and main bathroom. These are in no way a small improvement. They are quite significant improvements…new flooring, cabinets, counter tops and paint in the kitchen along with a full gut and renovation in the main bathroom.
After sitting down with a Mortgage Broker to determine mortgage affordability, the home owners next step is getting estimates for the renovations. After having multiple contractors quote on the work, the home owner settles on a contractor that has quoted $20,000.00 for the job (Labour and materials costs, all in, turn key project). Let’s also assume for a moment that the renovations are going to increase the value of the home by $30,000.00 (side note: Kitchen and Main Bathroom Renovations can have the biggest impact on the value of a home). Here is how it would look:
Refinance Plus improvements:
- Current Home Value: $250,000.00
- Post Renovation Home Value: $280,000.00
- New Max Mortgage Amount: $224,000.00
- Your Current Mortgage Balance: $190,000.00
- Equity Available for the renovations: $34,000.00
See the difference? The refinance plus improvements in this scenario can get the home owner access to an additional $24,000, far exceeding the improvements planned for home. No sacrifices required. No unsecured higher interest financing required. No need to tap into personal savings. Just a nice new mortgage with a low interest rate and one simple payment.
In a future post, we will cover the particulars regarding how the refinance plus improvement funds are advanced and a few other details that you are going to want to know. If you have questions about how a refinance plus improvements mortgage can make all of the difference with your renovations plans, please feel free to connect with our team. We are always happy to chat mortgage strategy with you while at the same time shopping the market and rates on your behalf!