Need Financing for Your Home Renovations?
If your family home is too small but you don’t want to move, you’ll be joining thousands of other Canadians who have chosen to renovate their properties. Whether you’re adding an extension, overhauling your kitchen, or knocking down walls to create better flow, you can likely count on one thing: you’re about to embark on an expensive project.
Don’t fret if your dreams are bigger than your budget—there are a lot of ways to finance home renovations. While it may be tempting to borrow money, just remember that you’ll have to pay that loan back with interest, so make sure you factor in potential future interest rate increases when making plans for financing upgrades to your property. Here’s how you can pay for improvements:
Borrow from family or take out a personal loan
Generally, a personal loan has a lower interest rate than a credit card. You can borrow a lump sum, repaying it over a set period. Typically, you’d pay monthly installments over one to five years, but it all depends on your lender and the terms you agree to. After you’ve repaid the loan, you’ll have to reapply if you want to borrow more money.
Refinance your mortgage
Some homeowners seek to finance their renovations by refinancing the terms of their existing mortgage. This way, you can borrow more money and pay lower monthly installments over a longer term. Refinancing your mortgage means adding more money to the total you have already borrowed from your bank or lender. It has a lower interest rate because your mortgage is secured by the equity in your home.
Get a line of credit
For a long-term renovation project, you can open a personal line of credit through banks or credit unions. You only pay interest on the funds you withdraw, and interest rates are lower than on a credit card. You may borrow funds multiple times up to the line of credit’s limit, as long as you keep making regular payments. This type of loan is ideal for major home improvement projects like remodeling your kitchen or adding an extra bathroom. Having an excellent credit score will help you qualify for this type of loan.
Get a home equity line of credit
A home equity line of credit (HELOC) is a low-interest loan option. Here’s how it works: You can borrow up to 80% of the assessed value of your home when it’s added to what you have left on your mortgage principal. This means if you still owe $300,000 on your $500,000 home, you can qualify for a HELOC of up to $160,000. You’re tapping into your home equity to access funds.
You can use these funds for anything—including renovations—and, as you pay off the HELOC, that credit is replenished. Just be careful not to keep withdrawing money as if it’s a bank account. You can also ask your lender to limit the available funds—just because you can access $160,000 doesn’t mean you should if your renovation project will cost less than the amount available. To get the most competitive interest rate, you may want to work with a mortgage broker.
Since HELOCs are tied to your home’s equity and costs like set-up fees are involved when you apply for one, working with a mortgage broker can help make sure you get the best deal possible.
Get a home equity loan
A home equity loan is a great solution for homeowners that want to access the equity in their home without touching or breaking their current mortgage. This can be for several reasons:
- Their mortgage isn’t up for renewal anytime soon
- They have a great mortgage rate locked in and don’t want to break it because that would mean getting a much higher rate
- Their current lender doesn’t offer a HELOC option
Though these home equity loans have a slightly higher interest rate than traditional mortgages, they are secured against the property and offer competitive rates, much lower than credit cards and other unsecured loans.
Consult with a mortgage agent or broker to get the conversation started.
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