While these renovations are often necessary, and some are even exciting, most Canadians don’t have the funds to pay for these projects outright.
According to Scotiabank poll results published in November 2020, 25% of Canadians have Saved money during the pandemic as a result of reduced spending on restaurants, entertainment, clothing, and commuting. Families in this fortunate location use new space in their budget to create Emergency savings, invest or pay off debts or finance a large purchase. Despite these savings, Canadians will have to borrow at least part of the cost of their proposed Reno projects. The big questions for many are: What options are available? And which one is best for you?
We asked Phil Davie and Josh Davie, an independent financial advisory team at Desjardins Financial Security Investments Inc. of Burlington, Ontario, to discuss some common home renovation financing options.
First, find out if you can afford to fund this Reno
In general, borrowing money for a home renovation is okay as long as you can adequately service the debt that it entails. This means understanding how the interest rate and repayment structure of your loan will affect your finances. For example, what is the monthly payment for a $ 30,000 loan or $ 50,000 line of credit, and can you afford to add this to your budget?
With so many loan options offered by your bank and other lenders, if you have a stable income, you probably have access to credit. However, it doesn’t necessarily mean that you should opt for it. “If you don’t qualify for a secured loan or secured line of credit, you probably shouldn’t do the renovation,” advises Phil. If you get turned down by a lender, you reflect your creditworthiness, debt, income, and other factors – including the size and affordability of your project. You may want to cut down on the renovation or wait until you’ve saved more of the cost.
Home Equity Credit Line (HELOC)
A home equity line of credit, commonly referred to as a HELOC, is a revolving line of credit that is backed by the equity of your home. Almost all banks and credit unions offer this type of lending. Since a HELOC is secured in your home, the interest rates are significantly lower compared to unsecured loans and lines of credit. Homeowners can typically borrow up to 80% of the estimated value of their home minus the amount owed on their mortgage. For example, if your home is worth $ 750,000 and you owe $ 300.00 on your mortgage, you can borrow up to $ 300,000 for a HELOC. Interest payments are structured but otherwise the homeowner can move money in and out of line at will. Most major financial institutions offer interest rates based on the lender’s base rate (e.g. Prime + 1%).
This is the option Shannon and Calvin Reynolds of Burlington, Ontario chose when they were renovating just before the pandemic. (We changed their names to protect their privacy.) “We didn’t have any money lying around to do a major renovation, [but] We had a good amount of equity in the house, ”says Shannon, noting that comparable homes in their area sell for far more than they owed on their mortgage. “A HELOC felt like a no-brainer because the renovation would add value to our home.”
Consultants Phil Davie and Josh Davie recommend a HELOC as a flexible, low-interest loan option available to most homeowners. In fact, Phil says, “Lots of people [already] Have HELOCs, but don’t use them. “In general, you can borrow an amount that, when added to your outstanding mortgage equity, does not exceed 80% of the estimated value of your home. So if your home is worth $ 700,000 and your mortgage balance is $ 350,000, you can be eligible for a HELOC of up to $ 210,000. ($ 350,000 + $ 210,000 = $ 560,000 or 80% of $ 700,000.)