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4 ways to cover the cost of home renovations

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In the past year, home renovation projects have gone up by almost 40% nationwide.

With the increased amount of time being spent at home lately, it should definitely come as no surprise that so many Canadians are looking to freshen up their surroundings.

But kitchen ‘de-kitsch-ing’, bathroom beautifications, and flooring facelifts don’t come cheap.

When it comes to covering the cost of your home renovations, however, you do have options:

1. Save up the money.

This is likely everyone’s first choice. To have enough savings so you can avoid taking on any more debt and having to pay interest.

But saving takes time, especially if you’re lower on the pay grid. Plus depending on the urgency (e.g., leaky roof needs replacing ASAP), you might not have the luxury of waiting until you have enough cash saved up. That’s where tapping into the right borrowing solution can help you to offset some, or even all of your renovation costs.

Prefer to save up to pay for your home renos? Building a budget that works is a great way to start.

2. Tap into equity.

If cash flow and/or savings are limited, leveraging home equity is a possible quick solution to finance your renovation goals (equity is the difference between how much you owe on your mortgage and what your home is currently worth).

Depending on your lender, you can borrow between 75%-80% of your home’s equity through a HELOC (home equity line of credit).

This means if your home has a market value of $500,000 and a mortgage balance of $350,000, you would presently have $150,000 in equity. Since you can borrow up to 80% of the value of your home, you’d have the potential to borrow up to $400,000, minus what you owe (i.e., $350,000)—which leaves $50,000 in equity you can then put toward renovations.

Best option for: those who are unsure of how much their renovations are going to cost; and/or prefer the flexibility of having an open-ended timeline for paying off the amount they borrow.

3. Refinance your (primary) mortgage.

If you would prefer to cash out on the equity in your home to cover renovations, refinancing your existing mortgage may be an option. Be sure to ask your existing mortgage lender about costs, and possible penalties, which can also impact remaining equity.

There are two main benefits of doing this over taking out a secondary loan, such as a HELOC:

  • The interest rate will be fixed over the mortgage term (whereas HELOC rates tend to be variable and fluctuate according to the Bank of Canada overnight rate, or your lender’s prime lending rate).
  • You will be making consistent payments for the duration of the loan term (with a HELOC, there is no set timeframe to pay back what you borrow—which leaves the potential of having a never-ending balance)

Keep in mind that refinancing your mortgage only makes sense if you have a considerable amount of equity in your home. It’s also a good idea to make sure that your credit score is in good standing, since poor credit scores can lead to paying much higher interest rates.

Best option for: those who want to have their renovation expenses and mortgage rolled into one easy payment—with a definitive timeline to be paid off.

4. Secure a second mortgage.

Unlike refinancing your existing mortgage (where the current mortgage is replaced), a second mortgage is a new loan that is added to/paid alongside an existing mortgage. It’s secured against the equity in your home, so for the most part, you can borrow up to 80% of its market value—meaning you’ll need to have at least 20% equity in order to qualify.

Mortgage rates for second mortgages tend to be higher and less competitive than rates for your primary home. Considering there are various fees, along with interest that accrues on the full loan, you’ll definitely want to weigh all of the cost factors before making this your renovation finance method of choice.

Best option for: those who face a larger penalty to refinance their existing mortgage, and who prefer a set term and amortization to pay off their renovation costs.

Need help making your home renovations a reality? Call on Educators Financial Group.

We’ve been helping education members to realize their home reno dreams since the 1970s (when wood paneling was considered chic). No matter where you are on the pay grid, or what your pension income is in retirement—we can provide you with the right borrowing solutions to suit your specific home renovation needs, goals, and budget.

Have one of our mortgage agents get in touch with you.

And be sure to ask our team about the following renovation-funding borrowing options:

 

Renovation Type

 

 

Borrowing Option

 

Pros

 

Cons

Estimated costs between
$50K – $150K

Inside your home:

  • Bathroom
  • Basement
  • Kitchen
  • Windows
  • Décor

Outside your home:

  • Driveway
  • Walkway
  • Landscaping/
    Garden
  • Secured Line
    of Credit
  • Easy access to funds
  • Draw as you go along
  • Payments as low
    as interest only
  • Payments based on outstanding balance
    (portion used)
  • Can put into place w/o disrupting pre-existing conventional mortgage
  • Once reno is complete, ability to convert into a new mortgage for P+I payments
  • Up to 80% of the current value of
    your home (prior to work being done)
  • Costs to put financing in place is known upfront
  • Usually slightly
    higher interest
    than conventional mortgage
  • If contractor asks
    for funds in advance, typically no inspection controls in place
  • Financing based
    on existing appraised value, not projected future value of work being done

For extensive renovations over $150K

  • Construction build
  • Addition/
    interior/exterior major structural changes
  • Construction Mortgage/Loan
  • Draw as you go along
  • Interest-only payments until project is done/ then converts to a conventional mortgage
  • Lenders will often finance up to 80% of the current home value. of your home, up front. Then up to 80% of the projected value after assessment by an approved appraiser
  • If you have equity available to cover costs, this can lead to an expedited process
  • Inspections for larger draws help to ensure that builders are requesting realistic draws for upcoming work—this helps you to stay in control of your draws/spending
  • Costs are usually based on a package deal including X number of draws
  • Any existing mortgages will need to be paid out by new lender (this could also be a benefit if you were thinking of alt. financing options)
  • Architectural designs, build contract, and permits must all be in place for appraised assessment of estimated completed value/neighbourhood conformity, prior to approval—funds for this will come from financing against
    the existing equity,
    or from savings
  • Cost for financing programs typically don’t include appraisals and inspections
    (be sure to budget
    for that)

Sources:
https://storeys.com/canada-home-renovation-increase-covid-19/

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