Ways to finance a home renovation in Canada
While these home renovations are often necessary, and some are even attractive, most Canadians cannot afford to fully pay for these projects.
Scotiabank poll results released in November 2020 show that 25% of Canadians saved money during the pandemic due to reduced spending on food, entertainment, clothing and travel. Families in this privileged position use new space in their budget to create emergency savings, invest or pay off debt, or help finance a major purchase. However, even with these savings in hand, Canadians will need to borrow at least a portion of the cost of their planned renovation projects. The big questions for many are: what options are available? And which is the best for them?
We asked Phil Davie and Josh Davie, a team of independent financial advisors with Desjardins Financial Security Investments Inc. in Burlington, Ontario, to learn about some common home renovation financing options.
First: find out if you can afford this renovation
Generally speaking, it’s okay to borrow money for a renovation as long as you can adequately repay the debt it creates. It means understanding how the interest rate and repayment structure of your loan will impact your finances. What will the monthly payment be on a $ 30,000 loan or a $ 50,000 line of credit, for example, and can you afford to put that into your budget?
With so many borrowing options available from your bank and other lenders, if you have a stable income, you will likely have access to some form of credit. However, that doesn’t necessarily mean you should go. “If you don’t qualify for a secured loan or a line of credit, you probably shouldn’t do the renovation,” advises Phil. A lender’s refusal reflects your credit history, debts, income, and other factors including the size and affordability of your project. You may want to consider cutting back on the renovation or waiting until you’ve saved more of the cost.
Home equity line of credit (HELOC)
A home equity line of credit, commonly known as HELOC, is a revolving line of credit secured by the equity in your home. Almost all banks and credit unions offer this type of loan, and because a HELOC is secured to your home, interest rates are significantly lower compared to unsecured loans and lines of credit. Homeowners can typically borrow up to 80% of the appraised value of their home less the amount owed on their mortgage. For example, if your house is worth $ 750,000 and you owe $ 300.00 on your mortgage, you could borrow up to $ 300,000 on a HELOC. Interest payments are structured, but if not, the owner can move money in and out as they see fit. Most large financial institutions offer interest rates based on the lender’s prime rate (eg prime rate + 1%).
This is the option Shannon and Calvin Reynolds of Burlington, Ont., Chose during the renovation shortly before the pandemic. (We have changed their names to protect their privacy.) “We didn’t have the money to do a big renovation, [but] we had good home equity, ”Shannon says, noting that comparable homes in her area are selling for far more than they owed on their mortgage. “A HELOC was a no-brainer, because the renovation would increase the value of our house.”
Advisors Phil Davie and Josh Davie recommend a HELOC as a flexible, low-interest borrowing option that is readily available to most homeowners. In fact, says Phil, “a lot of people [already] have HELOCs but don’t use them. Typically, you can borrow an amount that, when added to the outstanding principal of your mortgage, does not exceed 80% of the assessed value of your home. So if your home is worth $ 700,000 and your mortgage balance is $ 350,000, you could be approved for a HELOC of up to $ 210,000. ($ 350,000 + $ 210,000 = $ 560,000 or 80% of $ 700,000.)