Taking the Stress Out of Financing Home Renovation
Feeling cramped in your home? Getting bored of the old tiles and outdated appliances? Or you just decided that you need a hobby-den.
Of course, it could also be that your home needs an overhaul of its plumbing lines. The reasons are as varied as the homes and their owners in Canada. But it all boils down to one thing – it is time for some sprucing up, some TLC and yes, it is time for renovating your home.
If you think it is a piece of cake (because nothing can beat the home-buying process), well, we are here to burst that happy balloon. Home renovating can be as stressful and fraught with pitfalls as buying a home in Toronto. As always, it is a split between how you manage your cash flow and finances while also getting the makeover that you want.
We are not disputing the fact that beyond an aesthetic makeover and additional comfort (when it is done right), a house renovation is also a boost for your home’s worth. If you are planning an update before you list your Mississauga detached home for sale, then it is absolutely worth the time and effort. Read our blog on home renovations to get a better idea of what to do to get the most out of them.
This article is not about that, though. Today we are here to help you figure out the best way to finance the changes you want. There are plenty of financing options, but which is the right one for you? Like all mortgages, you need to consider interest rates, credit score, and the current property value when determining the most cost-effective financing method.
We introduce you to your choices – from home equity loans that leverage your property’s value to personal loans and credit lines that consider your credit score and monthly payments. Additionally, we walk you through the application process, sprinkling in a few tips for ensuring your application is successful and managing your finances without overburdening your budget.
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Home Renovation Financing Options
Home renovations can quickly scale up to be a stiff financial expense. Thus, choosing the right financing plan is really important. These are some common options to consider:
Home Equity Line of Credit (HELOC)
This is a popular route for many Canadian homeowners, especially for larger loans.
A HELOC allows homeowners the freedom to borrow what they need when they need it. The funds are disbursed against their home equity, with a limit that is fixed by the lender.
This option offers flexibility, as funds can be drawn and repaid repeatedly over a longer period of time (within the specified limits).
However, you will need at least 20% home equity if you have an existing mortgage or 35% for a stand-alone HELOC. Also, interest rates are variable and may fluctuate over time – so take the time to consult a professional before you decide.
Home Equity Loan
Just like a HELOC, a home equity loan allows eligible homeowners to borrow funds against their home’s equity. However, it is a more rigid framework, with a lump sum amount disbursed upfront, a fixed interest rate, and a repayment schedule. This is good news for homeowners who prefer everything clear-cut and dried.
This option is suitable for larger, one-time renovation projects where time is of the essence and schedules are strictly adhered to. But, of course, it lacks the flexibility of a HELOC.
Mortgage Refinance
This is fairly simple – you can just refinance an existing mortgage. This rejuggling of your current mortgage can provide the extra funds you need for renovations.
A refinanced mortgage usually offers lower interest rates than other financing methods, but closing costs and a longer repayment period are part of the scheme. Use our Mortgage Calculator to help figure out the best option.
Personal Loans
If your home renovation is on the more modest side, then unsecured personal loans can be an option.
Here, the loans are determined by the borrower’s credit score and income rather than their home equity. Interest rates are potentially higher than secured loans, but the application process is simpler and faster.
Credit Cards
Another option for small-scale renovations, credit cards can be a convenient option for quick-fix projects or unexpected expenses. However, there is a risk of high interest rates. The potential for accumulating debt and a subsequent dip in your credit score should be carefully considered before you decide to go for this route.
Store Financing Programs
An out-of-the-box option is choosing an in-house financing program from a reputed home improvement store. Several of the larger home improvement businesses in Canada offer credit services and financing programs to their clients.
These programs may provide promotional interest rates or deferred payment options and seem like a fantastic idea. However, always review the small print before signing on for the offer.
As you would do with the other options, interest rates, repayment terms, fees, and your finances should all be taken into account, before deciding.
Choosing the Best Financing Method
How do you go about selecting the financing method that is best for your needs and finances? You should consider the following factors.
Interest Rates and Other Fees
Straight up, look at the interest rates and associated fees – they will impact the overall cost of financing. Typically, secured loans offer lower interest rates. On the flip side, they have additional fees, including appraisal fees or closing costs. Evaluate the interest rates and fees that are part of each financing option to determine the most cost-effective option.
How Much Can You Borrow?
This is a critical question. The funds required for the renovation play a big role in narrowing your borrowing options.
Fiscal options like home equity loans are directly linked to the equity in the property. Though they have a limit on the maximum amount that can be borrowed, this may be the better choice for larger loans.
Personal loans or credit cards have lower borrowing limits, making them more suitable for smaller projects. Homeowners should ensure the financing option can provide sufficient funds for their renovation budget.
How Difficult is the Process?
It is human nature to prefer the easier route. Just make sure that this is the right option for you.
Secured loans, such as refinanced mortgages, are complex and require extensive documentation and underwriting processes. Personal loans or credit cards have a simpler application process but stricter credit score requirements. If you can provide the necessary documentation, then we advise you to be patient and wade through the process that best aligns with your specific needs and financial situation.
A Step-by-Step Guide on Applying
Applying for a home renovation loan can be like entering a maze, but a step-by-step approach will make it easier. Here’s a guide to help homeowners navigate the application process successfully:
Understand the Requirements
- Assess your credit score: Lenders typically have a minimum credit score requirement for loan approval. Check your credit report proactively and address any issues that may negatively impact your score.
- Determine the loan amount: Decide on the scope of your renovation project – and then, calculate the estimated costs to determine how much you need to borrow.
- Research lender options: Once you have a ballpark figure, approach different lenders, including credit unions and online lenders, to find the most suitable interest rates and terms for your situation.
Collect Necessary Paperwork
- Gather income documentation: Proof of income documents – bank statements, pay slips, tax returns, etc., are a necessary prerequisite for lenders to assess your creditworthiness and ability to repay the loan.
- Provide property information: Keep ready details about your property, including its current value, outstanding mortgage balance, and any other liens or encumbrances.
- Prepare renovation plans and estimates: Remember to have detailed plans and estimates for the proposed renovations. Lenders may require them to ensure the funds are being used appropriately.
Completing and Submitting Applications
- Fill out loan applications: Carefully complete the loan applications, ensuring all information is accurate and up-to-date. You can consult a mortgage broker to ensure this part of the process is reviewed for accuracy.
- Submit required documentation: Provide the lender with all necessary documentation, such as income verification, property details, and renovation plans.
- Follow up and respond promptly: Stay in touch with the lender, so you can cater to any additional requests from the lender to expedite the approval process.
Tips for Successful Loan Approval
These tips can increase your chances of successful loan approval:
- Lenders favour borrowers who have good to excellent credit scores, as they indicate a lower default risk. It is in your best interests to review and ensure you have an optimal credit score.
- To prove that you have a stable income to make the loan payments, ensure your documentation is up-to-date, error-free and easily accessible. If you’re self-employed or do not have a regular income, use documentation like profit and loss statements or contracts to prove your earning potential.
- Pay down or consolidate existing debts before applying for a home renovation loan. This will improve your debt-to-income ratio and increase the chances of approval.
- Prepare a detailed plan for your renovation project, including a realistic budget and schedule. A comprehensive overview of your plans is a demonstration of your commitment and financial responsibility.
Managing Your Finances Post Loan Approval
Congratulations, you have secured a home renovation loan!
This does not mean you take your foot off the pedal and relax. You must actively manage your cash flow to ensure a smooth repayment process and avoid financial mishaps.
Create a detailed budget that includes your income and expenses, adding in the new loan repayment amount. Allocate funds for expenses, review regularly review and tweak your budget as needed.
Ensure that you make loan payments on time. You can also make additional payments whenever possible to reduce the overall interest and cut short the loan term.
Look out for opportunities to cut expenses and generate additional savings. Two things that you can do is to reduce discretionary spending and negotiate better rates for your services.
Conclusion
There are several financing mechanisms, and each has benefits that suit specific financial scenarios and project scales.
The critical takeaway is that you comprehensively research the project and plan as meticulously as possible. Keep our tips in mind, and you will be in a better position to make informed decisions.
For any questions about real estate, contact us, and we shall help ensure your real estate needs are fully met.
FAQs
What are the options for financing home renovations in Canada?
Using the equity of your home is an efficient way to fund significant renovation projects. This is because home equity loans and lines of credit usually have lower interest rates compared to other financing options. You can manage both your mortgage and home improvement credit under a single plan.
What is the most advisable method to borrow money for home improvements?
The optimal loan for home improvements varies based on your financial situation. If your home has substantial equity, a Home Equity Line of Credit (HELOC) or a home equity loan might be the best options. Alternatively, a cash-out refinance could be suitable if it allows you to reduce your interest rate or shorten the duration of your existing loan.
Is it more advantageous to finance renovations or to pay with cash?
Paying with cash is beneficial as it ensures you can afford your renovations without accruing what are often referred to as “toxic” debts, which carry high interest rates.
Are renovation loans difficult to obtain?
Securing a renovation loan requires excellent credit and a stable income. Without these, it can be challenging to qualify since lenders typically seek assurance that you are a low-risk borrower capable of making regular loan repayments.
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