Upside of refinance and renovations

The exception to the maximum refinance rule

On July 9, 2012, then Finance minister Jim Flaherty introduced a rule preventing homeowners from borrowing more than 80 per cent of their property value.

The logic behind this decision was clear – to prevent Canadians from using their home equity as a bank account like many Americans did leading up to the credit crisis in 2008.

The implications were immediate. Canadians could no longer refinance higher interest debts into low-interest rate mortgages. Not-so coincidently, consumer debt levels correspondingly jumped. The new rule also prevented Canadians with enough home equity from refinancing for renovation purposes. Or so they thought.

Enter the little-known Refinance Plus Improvements (RPI) program. RPI, though not offered through most financial institutions, is a Canadian Mortgage and Housing Corp.-backed mortgage product that allows borrowers to refinance up to the improved value, or value after renovations, of their home.

For example, a homeowner with a property worth $400,000 prior to improvements would be allowed to refinance up to $320,000. But if the owner intended to renovate and increase the home's value to $440,000, he or she could refinance up to $352,000. That would give the homeowner an additional $32,000 to complete the renovations.

The only stipulation is the homeowner must complete the renovation and pay for it in full prior to the bank releasing the additional $32,000. The good news is the rate would be the same as a normal mortgage, which is currently at an all-time low.

Most homeowners who use this program pay for the renovations using a credit card or through retail credit from home improvement stores. Some renovation companies can also arrange short-term financing to meet this requirement.

So if some spring landscaping or home improvement thoughts are on your mind, you owe it to yourself to take a look at the RPI product. You may be just a few simple steps away from turning your home into your dream home.

Nolan Matthias holds a Bachelor of Arts Degree in Economics, is the co-founder of Mortgage360, and the author of The Mortgaged Millionaire.

* This content was produced by CREB®Now's advertising department, in consultation with Mortgage360. CREB®Now's editorial department was not involved in its creation.

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