How to Finance for Home Improvements?
More often these days, Canadians prefer to relax, entertain and work from home. A renovation offers tremendous opportunities to create a home that reflects the way they like to live and contributes to their enjoyment of life.
Alternatively, many people undertake renovations to make their property more attractive to sell. These renovations can help in speeding up the sale of a property or getting a better price.
Others simply renovate to increase the property value.
Depending on the scale of your renovation, there are a number of ways to finance your home improvements.
For smaller projects, you might want to consider paying cash or personal borrowing. By this we mean obtaining loans or revolving credit lines that you’d get at a retail bank and that are not tied to, or secured, against any assets.
For example:
Credit cards – easy to get and convenient for smaller projects, but interest rates can be high to very high, and unpaid/outstanding balances can impact your ability to qualify or requalify for a mortgage.
Personal line of credit – easy to get, interest rate typically lower at prime rate plus 2 or 3%, and because it’s revolving, you can pay it off and then re-use it.
Home improvement loan – gets you funds up front at a competitive interest rate, and typically offers a structured repayment plan to make sure you pay the loan off in a specified time frame, say 1 to 5 years.
Deferred Payment Plan – typically used to purchase a particular product, such as a garage package or large appliance. Attraction is little or no payments for 1st year, but be careful, as the rates are typically approaching 29.9% after that, typically just a high-interest credit card in disguise.
The trick with the above noted examples is keep the renovation small and understand what it is going to take on your part to repay the debt in a given time frame.
For larger projects, you may want to consider borrowing against the existing equity in your home, or the equity you can create doing smart renovations.
Some examples of this are:
HELOC or Home Equity Line of Credit – works much like a personal line of credit, typically at prime rate +, and you can borrow the money up to your limit whenever you want and repay as you wish.
Mortgage Add-On (2nd mortgage) – this is a loan on top of your existing mortgage. You must repay this loan in addition to the required payments on the original mortgage. Comes at a higher cost than a HELOC.
Refinance with Equity-Take-Out – this means you replace your existing mortgage with a new mortgage up to 80% of the property’s appraised value. You end up with a lump sum of cash at the beginning of your project and can spend it as you see fit.
Refinance Plus Improvements – this is a way to get 80% lending based on the NEW “as-improved” value of your property, not the existing value as in the above methods. This means access to more cash for extensive renovations, but you get the money as the improvements are completed and inspected, not before.
Purchase Plus Improvements – when you are buying a home, this is a way to get money in excess of the purchase price to be used for specific renovations as agreed to as part of the purchase mortgage financing. The extra funds available are based on the new “as-improved” estimated value of your property, in excess of the original purchase price. This means access to cash for extensive renovations, such as new roof, new kitchen, new bath, new windows and doors, etc.
NOTE: Initial set-up costs may also include legal, appraisal fees and/or Broker/Lender Fees.
Purchase Plus Improvements and Refinance Plus Improvements
Rather than purchasing a new built home, many of our clients are purchasing properties in desirable locations, and then renovating them. Some already own their property and want to do updates (Refinance Plus Improvements). This could entail something as simple as removing carpet in every room of the house and putting in hardwood floors throughout, or as detailed as putting in a basement suite to help generate rental income.
In order to apply for this product, you’d need to provide detailed quotes for the project, outlining the scope of the work to be done and the cost. It’s important to get quotes from contractors and stores for the work involved with all actions and materials clearly described. If construction permits are required, make sure you know that you can obtain them and be able to provide evidence of this. The lender will then review your project and then determine how much the renovations improve the value of the home (not the cost of the improvement).
Upon mortgage approval, the lender advances the “value” of the improvements (less the borrower’s required percentage) to the borrowers’ lawyer’s trust account to remain there until the work is completed and inspected. Once that has been completed, the lender will authorize the lawyer to release the “hold back funds” to you. Multiple advances (or draws) may be available for larger projects, but generally there is only one advance at the end of the project.
It’s important to note that you, the borrower, must complete the improvement on a timely basis before you receive the funds. This means either you can cover the improvement costs yourself, or the contractor will carry the costs until after project is complete or inspection done. NOTE: Lenders generally offer a 60 – 90 day window to complete the improvements/renovations.
If you are thinking about doing a renovation project (big or small), give us a call and let’s review your financing options.
Share This Article
