Wednesday, 8 July 2015

Financing Options For Your Home Renovation


For many people, renovating is part of the joy of homeownership. We love being able to update, renovate, and rebuild the places we live and this can go hand in hand with increasing the value of your property. To learn about which upgrades return the most value, check out my article The Best Renovations for Resale Value.

Ok, now that you've decided on what you'd like to do and in which areas of your home, how are you going to pay for it?  When it comes down to it, you have several options and if you choose to borrow, follow my tips to borrow smart and not get stuck paying excessive interest rates!

Cash

Cash is king, and always will be. If the return on investments continues at the historical lows we've been seeing lately, there is not much point in tying up your hard-earned money in an investment with little to no return. Despite the myriad of low-interest financing options available, unless you can guarantee a great return then using your savings might be an excellent option for you.

Refinance Your Mortgage

A major renovation is a great time to have a look at your existing mortgage to see if it might be worth using some of your equity to finance the project. With mortgage rates continuing along at historical rock bottom, there will rarely be a better opportunity to borrow more money against your home. An option for those buying a home could also be the Purchase Plus Improvements mortgage. Here's an article with details on how this product could work for you. It can allow you to borrow extra money as part of your mortgage(at your low mortgage rate) to allow for renovations of your new home.

HELOC

HELOC stands for home equity line of credit, and is essentially a line of credit which is secured by your home. Having the security of your home backing this means lenders will usually offer you very low rates and great terms. You may withdraw only as much money as needed as your renovation goes along, therefore saving you money in interest, and you may repay it at any time without penalties. The disadvantage of a HELOC is that you must have more than 20% equity in your home to qualify. That means if your home is worth $200,000 and your current mortgage is $100,000, your HELOC cannot be more than $60,000 max.

Unsecured Line of Credit

An unsecured line of credit is available to qualified borrowers at most financial institutions and is similar to a HELOC, except it does not have the security of your home used as collateral. This is an option to consider for new buyers using the Purchase Plus Improvements mortgage as it allows you the funds needed to complete your renovation project and to have your final mortgage amount released(See here for more details). This is also a good option if a necessary renovation or repairs come up and you do not have the cash available. An unsecured line of credit comes at a much higher interest rate than a mortgage or HELOC and should be considered if the prior 2 are not an option, in order to minimize your interest costs.

Promotional Offers

If used with caution, a renovation could also be a great time to utilize a bank or credit card
promotional offer. These offers usually take the form of a low interest rate for a short period of time, after which the interest rate increases significantly. If you are able to pay off the debts within the promotional period, this can be a great way to finance your reno in the short-term while getting a fantastic rate. Many people forget to keep track of offers like this however, so make sure if you are considering this that you mark the dates in your calendar and be sure to pay it off asap. Service charges and increased interest can completely offset any savings had if the debt is still owing when the promotion expires.

Other Considerations

One of the keys to successfully financing a renovation is to actively manage your chosen finance method. It is important to take note of any penalties, charges, or interest rate increases that will come along later on. You may be able to prepay a portion of your mortgage each year for example, but only up to your lenders limits before incurring a penalty. If you want the flexibility of repaying the debt completely at any time, then any of the other options should be considered as well.

There are plenty of things to think about when tackling your next renovation, with financing being just a small part of the puzzle. I'd be happy to help you through the process and I have the experience and programs to help your renovation project succeed. Contact me at any time at RSmith@mortgagewest.ca or visit me online at www.ryanwsmith.ca


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