What are my home renovation financing options?

Use your cash on hand or savings to pay for your renovations

After drawing up a renovation budget, you’ll first want to check your ready cash and savings. You might actually have enough to pay for the work.

But you might also want to budget an amount for systematic savings to cover future renovations. By setting specific goals, you may be able to save up the amount you need within, say, a year.

The advantage:

• You won't need to borrow or use credit.

Things to think about:

• Keep your emergency fund, and don’t dip into the savings you’ve set aside for other projects. If your TFSA is for your retirement, we recommend finding another way to pay for renovations.
• Don’t use your RRSP for renovations either! Anything you withdraw will be taxed.
• Check how much interest you’re earning on your savings, if any. If that interest rate is higher than what you’d pay on a loan, it’s better to keep your savings. And don’t forget that if you cash out investments that have gone up in value, the money will be taxed as a capital gain for the year of the withdrawal. Which means you may owe money when you file your taxes.

Finance your renovations with your home loan when you buy your house

If you’re about to buy a fixer upper, you can add the amount you’ll need to finance the renovations into your mortgage.

For example, say you buy a house for $400,000, but it needs $30,000 worth of work in the kitchen and bathroom. If you can make a down payment of $86,000, you can take out a mortgage for $344,000. That’s the price of the house plus the renovations, minus the down payment.

While there are several advantages to financing your renovations this way, there are also some obligations to consider.

Advantages:

• If you amortize your loan for the renovations over a longer period of time, your payments will be lower than if you’d financed them some other way. Note that mortgages are generally spread over 25 years.
• The interest rate is generally lower than for any other kind of financing.
• You can start renovating as soon as you’ve bought the house.
• And you won’t use your savings or emergency fund to pay for it.

Considerations:

• Before you can apply for the loan, you’ll have to get plans and quotes to determine the cost of the renovations.
• You must make sure the renovations don’t end up costing more than what you planned when you got the loan. If there are any overruns, you’ll have to pay for them yourself. That’s why we recommend putting money aside.
• You’ll also have to show receipts for the work and submit a final inspection report to your financial institution.
• Lastly, you might want to buy loan protection insurance to reduce the size of your down payment. Financing at 95% of the loan-to-value ratio might be possible.

Refinance your home to pay for your renovations

Remortgaging your house can be a good way to get the funds you need for renovations, provided you have enough home equity, of course.

What is equity? It’s the difference between your house’s current market value minus what you owe on your current mortgage.

So if you have a $300,000 house and still owe $150,000 on it, you could borrow $90,000 to pay for renovations: ($300,000 x 80%) − $150,000 = $90,000.

Refinancing can be advantageous when the renovations will add value to your home. By increasing its value, you increase the probability of a return on investment when you sell.

Like all financing options, this one has both advantages and disadvantages.

Advantages:

• The interest rate is generally lower than for other kinds of financing.
• Your loan may be amortized over a longer period, so your payments will be lower.
• You hang on to your savings, your cash, and your emergency fund.

Considerations:

• Before taking this route, make sure your renovations will add value.
• In some cases, you’ll have to pay fees to have a notary record your mortgage refinancing.

Get a home loan equity line of credit for your renovations

A home equity line of credit can be advantageous if you want payment flexibility.

To make an informed choice, you must understand the difference between a mortgage, a home equity line of credit, and a personal line of credit. Like all the mortgage options mentioned above, a home equity line of credit is based on your home’s market value.

If you already have a mortgage, think about getting a home equity line of credit when you refinance.

Advantages:

• With a credit line (as opposed to a mortgage), you don’t have to use the whole amount. You can use the credit you need, pay that back, then borrow again until you reach your credit limit without having to apply for a new loan.
• As with any credit line, the money is available at all times.
• The interest rates are generally lower than for many other types of financing, and the interest on the credit you’ve used is the only thing you have to be sure to pay every month.
• You can use your credit line for all types of projects, not just renovations.
• You can convert a portion of the balance you’ve used into a mortgage loan incorporated into your credit line. That way you can make payments according to an established schedule.

Considerations:

• You will have to be disciplined and pay back principal to reduce your long-term debt.
• You can finance up to 80% of your property’s value, but at most 65% of that amount will be allocated to the home equity line of credit and the remaining 15% will be included as a mortgage, if necessary (with a fixed or variable rate).

Consider a personal line of credit or a personal loan to renovate your home

You can also use a personal line of credit or a personal loan to pay for your renovations. These are both advantageous ways to finance small jobs.

Unlike the previous options, these two don’t involve your house.

Advantages of a personal line of credit:

• A credit line is flexible and provides quick access to cash.
• You can limit your monthly payments to the interest on the credit you’ve used.
• And you can use the funds for any type of project. Once the credit line has been approved, there’s no need to prove the work has been done.
• Unlike a personal loan, a personal credit line allows you to keep reusing what you’ve paid back, up to the revolving limit (I.e. the portion that you can borrow again, without having to apply for a new loan.)
• Other than for mortgages, the interest rates on credit lines are generally lower than for any other type of financing, such as a personal loan or credit card.

Consideration:

• This type of financing requires more discipline! Set a repayment schedule.

Advantages of a personal loan:

• With a personal loan, you can pay off your renovations over a predefined period.
• It’s an ideal way to make sure you reach your repayment objectives if you need help to stay on track.

Considerations:

• Once you’ve paid off a personal loan, that’s it. It’s closed. You can’t withdraw the amount you borrowed a second time. That can be an advantage or a disadvantage, depending on your situation and preferences.
• Your payments may be higher because the amortization period is shorter.

Use your credit card to pay for your home renovations

Credit cards are very convenient means of payment. For example, you can use them to buy materials and tools in stores or online.

But you can also view your credit card as a way to cover unexpected expenditures. Especially if you understand how it works and are in the habit of paying it off in full every month.

Depending on which card you have, you may be eligible for generous discounts or rewards and, in some cases, an additional warranty on your purchases.

Look for government financial assistance and tax credits

Some provincial governments offer financial assistance and tax credits for eco-friendly renovations, so you may be able to lower your costs this way. You’ll have to make sure the financial assistance and credits are still being offered when the work starts and that you meet the eligibility criteria.

Calculate your costs first

• Before choosing a particular type of financing, make a budget for your renovations so you have a good idea of what the total cost will be.
• Want to make sure your means match your ambitions? Calculate your debt-to-income ratio. Talk with your advisor, who will help you choose the solution that suits you best.
• Lastly, draw up a general budget in addition to your renovation budget. By comparing the two, you’ll see how big a monthly loan payment you can make for the renovations.

Regardless of how extensive renovations are, there are always unexpected expenses, so budget more than you think you need.