If you have found a great house but it needs a bit of work before becoming your dream home, one option is to finance the renovations at the time of purchase by adding the cost to your mortgage.

Buyers who are putting less than 20% down and need a mortgage, which is covered by loan insurance, can apply for a loan to cover up to 95% of the value of the home after renovations are completed. However, mortgage advisors say read the fine print of deals such as those covered by CMHC mortgage loan insurance.

“The one catch about the CMHC product … is that you still have to have the money to do the renovation before you get it funded to you,” says Jim Rawson, regional manager of Invis mortgage brokerage firm in Toronto.

At the time of purchase, you make an application to CMHC, providing an appraisal of the current value of the property, quotes from contractors for the renovations and an appraisal of the value of the property once the proposed renovations are complete.

“Then they’ll give you a mortgage commitment for 95% of the value after the renovations are done, but at time of closing they only will fund 95% of your purchase price or the value as it is today,” Mr. Rawson says. “You still have to have the cash to get the work done, and then have another inspector out to take a look at the property and then they’ll refund you that money towards the mortgage.”

If the increase in the market value of the home is 10% or less, then the lender can advance the funds once the renovations are completed without further authorization from CMHC.

While you may qualify for the mortgage loan insurance, a lender will want to be sure that the proposed renovations will really add value to the home.

“A lot of times the bank will look at the house and say, ‘No, we’re not willing to offer that [type of loan],’ even though you qualify,” says Jeff Mayer of the Mayer Group, part of the brokerage firm Mortgage Intelligence in Toronto. “That [location] might not warrant that extra amount of money for renovation.”

Mr. Mayer says the lender will want to make sure the renovations add value to the property straight away, but he also says home buyers need to carefully consider if the renovations are a good investment.

“Ask yourself, ‘What’s my plan and how long do I want to live here?’ Mr. Mayer says. “Whatever renovations you’re doing, make sure they’re tasteful, make sure that the house would be able to be sold afterwards. It’s not a renovation that only caters to you.”

Mr. Rawson says if you have taken out a line of credit to cover the renovations, rather than, say, borrow from a family member, adding this amount to your mortgage on completion may not make financial sense.

“It’s probably just as well that you leave that renovation cost on that line of credit,” Mr. Rawson says. “Instead of amortizing that debt over 25 or 35 years, most people will pay [a line of credit] down faster than their mortgage, so even though the interest cost might be slightly higher on their line of credit, they’ll pay less interest by paying down the line of credit faster.”