4 ways to cover the cost of home renovations

(Reading time: 3:30) 

In the past couple of years, home renovation projects have gone up by almost 40% nationwide.

With the increased amount of time everyone has spent within their own four walls recently, it’s definitely no surprise why so many people decided to freshen up their surroundings.

In fact, a whopping 73% of Canadians have carried out some type of home improvement project.

But kitchen ‘de-kitsch-ing’, bathroom beautifications, and flooring facelifts don’t come cheap—with Ontario homeowners spending an average of $13,603 on improvements.

When it comes to covering the cost of your home renovations, however, you do have options:

1. Save up the money.

Having enough savings versus taking on any more debt (and having to pay interest on that debt) is likely everyone’s first choice.

But saving takes time, especially if you’re lower on the pay grid.

Plus depending on the urgency (e.g., leaky roof needs replacing ASAP), you might not have the luxury of waiting until you have enough cash saved up. That’s where tapping into the right borrowing solution can help you to offset some, or even all of your renovation costs.

Prefer to save up to pay for your home renos? Building a budget that works is a great way to start.

2. Tap into equity.

If cash flow and/or savings are limited, leveraging home equity is a possible quick solution to finance your renovation goals (equity is the difference between how much you owe on your mortgage and what your home is currently worth).

Depending on your lender, you can borrow between 75%-80% of your home’s equity through a HELOC (home equity line of credit).

This means if your home has a market value of $500,000 and a mortgage balance of $350,000, you would presently have $150,000 in equity. Since you can borrow up to 80% of the value of your home, you’d have the potential to borrow up to $400,000, minus what you owe (i.e., $350,000)—which leaves $50,000 in equity you can then put toward renovations.

Best option for: those who are unsure of how much their renovations are going to cost; and/or prefer the flexibility of having an open-ended timeline for paying off the amount they borrow.

3. Refinance your (primary) mortgage.

If you would prefer to cash out on the equity in your home to cover renovations, refinancing your existing mortgage may be an option. Be sure to ask your existing mortgage lender about costs and possible penalties, which can also impact remaining equity.

There are two main benefits of doing this over taking out a secondary loan, such as a HELOC:

• The interest rate will be fixed over the mortgage term (whereas HELOC rates tend to be variable and fluctuate according to the Bank of Canada overnight rate, or your lender’s prime lending rate)
• You will be making consistent payments for the duration of the loan term (with a HELOC, there is no set timeframe to pay back what you borrow—which leaves the potential of having a never-ending balance)

Keep in mind that refinancing your mortgage only makes sense if you have a considerable amount of equity in your home. It’s also a good idea to make sure that your credit score is in good standing, since poor credit scores can lead to paying much higher interest rates.

Best option for: those who want to have their renovation expenses and mortgage rolled into one easy payment—with a definitive timeline to be paid off.

4. Secure a second mortgage.

Unlike refinancing your existing mortgage (where the current mortgage is replaced), a second mortgage is a new loan that is added to/paid alongside an existing mortgage. It’s secured against the equity in your home, so for the most part, you can borrow up to 80% of its market value—meaning you’ll need to have at least 20% equity in order to qualify.

Mortgage rates for second mortgages tend to be higher and less competitive than rates for your primary home. Considering there are various fees, along with interest that accrues on the full loan, you’ll definitely want to weigh all of the cost factors before making this your renovation finance method of choice.

Best option for: those who face a larger penalty to refinance their existing mortgage, and who prefer a set term and amortization to pay off their renovation costs.

Need help making your home renovations a reality? Call on Educators Financial Group.

We’ve been helping education members to realize their home reno dreams since the 1970s (when wood paneling was considered chic). No matter where you are on the pay grid, or what your pension income is in retirement—we can provide you with the right borrowing solutions to suit your specific home renovation needs, goals, and budget.

Have one of our mortgage agents get in touch with you.

And be sure to ask our team about the following renovation-funding borrowing options:

Sources:
https://storeys.com/canada-home-renovation-increase-covid-19/
https://reviewmoose.ca/blog/home-improvement-industry-statistics/

Brokerage License 12185. O.A.C.