Since the COVID-19 pandemic entered our lives last spring, Canadians have been spending a lot more time at home—and in many cases, it’s inspired both indoor and outdoor renovation projects. New consumer research suggests 23% of Canadians have completed a renovation in the past year and an additional 21% are considering a renovation in the near future. The shift to backyard visits may have made a new deck or freshly landscaped patio more appealing, and in some cases, remote work or virtual school has highlighted the need for a space that functions as a home office. Others are noticing overdue cosmetic updates or are using this time to complete repairs around the house.
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While these home renovations are often necessary, and some are even exciting, most Canadians don’t have the means to pay for these projects outright.
According to Scotiabank survey results released in November 2020, 25% of Canadians have saved money during the pandemic as a result of reduced spending on dining out, entertainment, clothing and commuting costs. Families in this fortunate position are using newfound space in their budget to create emergency savings, invest or pay down debt or to help fund a large purchase. Even with these savings in hand, however, Canadians will need to borrow at least part of the cost of their planned reno projects. The big questions for many are: What are the options available? And which is the best for them?
We asked Phil Davie and Josh Davie, an independent financial advisory team with Desjardins Financial Security Investments Inc. in Burlington, Ont., to walk through some common home renovation financing options.
First: Find out if you can afford to finance this reno
Generally speaking, it’s OK to borrow money for a renovation as long as you can adequately service the debt it creates. This 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 add that to your budget?
With so many borrowing options available from your bank and other lenders, if you have a steady income you’ll likely have access to some form of credit. However, that doesn’t necessarily mean you should go for it. “If you don’t qualify for a secured loan or line of credit, you probably shouldn’t do the renovation,” Phil advises. Getting turned down by a lender reflects your credit history, debt, income and other factors—including the size and affordability of your project. You may want to consider scaling back the renovation, or holding off until you’ve saved up a larger proportion of the cost.
Home equity line of credit (HELOC)
A home equity line of credit, commonly referred to as a HELOC, is a revolving line of credit that is secured by the equity in your home. Nearly all banks and credit unions offer this type of lending, and because a HELOC is secured to your home, interest rates are significantly lower when compared to unsecured loans and lines of credit. Homeowners can typically borrow up to 80% of the appraised value of their home minus the amount owing on their mortgage. For example, if your house is worth $750,000 and you owe $300,00 on your mortgage, you would be able to borrow up to $300,000 on a HELOC. Interest payments are structured, but otherwise, the homeowner is able to move money in and out of the line as they please. Most major financial institutions offer interest rates based on the lender’s prime rate (for example, prime +1%). currently 7.2%
This is the option that Shannon and Calvin Reynolds of Burlington, Ont., chose when they renovated shortly before the pandemic. (We’ve changed their names to protect their privacy.) “We didn’t have cash lying around to do a big renovation, [but] we had a good amount of equity in the house,” Shannon says, noting that comparable homes in her area are selling for far more than what they owed on their mortgage. “A HELOC felt like 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, Phil says, “a lot of people [already] have HELOCs but don’t use them.” In general, you can borrow a sum that, when added to your outstanding mortgage principal, totals no more than 80% of the assessed value of your home. So if your home is worth $700,000, and your mortgage balance is $350,000, you may be approved for a HELOC of up to $210,000. ($350,000 + $210,000 = $560,000 or 80% of $700,000.)
Once you’re approved, the funds can be used for anything you choose: a renovation, a new car, unexpected expenses. Many homeowners opt to set up a HELOC with their lender just to have credit available immediately if needed. However, this type of credit can be dangerous if you’re prone to overspending or bad at setting boundaries.
Here’s an example. Say you need $10,000 to fund a small renovation, but your lender approves a HELOC of $100,000 or more at a great interest rate. That makes it really tempting to increase the scope of your renovation or even take a family vacation. As you make payments back to the line, that credit becomes available again, allowing you to re-borrow funds. If you are only making the minimum payment each month—usually just the interest owing on the amount you’re currently using—while you continue to draw additional funds from the line of credit, your debt can skyrocket.
It’s best to use a HELOC for planned expenses only, and avoid using it for discretionary spending or filling gaps in your monthly budget.
Shannon and Calvin agree that a HELOC needs to be used with caution. The couple added a spacious extension to their bungalow and completed some landscaping in the backyard, borrowing approximately $135,000.00 for the project. While they are pleased with the results and have no regrets about their financing, discipline was key. “I was shocked by how much the bank was willing to give us,” Shannon says. “It was like, four times as much money as we needed. We could have gone crazy. I was surprised by that.”
If you’re worried you may overspend on a HELOC, ask your lender to set a limit you’re comfortable with. Just because you get approved for the maximum amount doesn’t mean you have to take it. So, if you only need half of what they’re offering, ask them to meet you there.
While most homeowners approach their mortgage lender when applying for a HELOC, Phil notes that you can also work with a mortgage broker to find a more competitive rate. Before going this route, be sure to ask the mortgage broker if you’ll incur any fees for using their services; typically, the lender will pay the broker, but this is not true in all cases.
Refinancing your mortgage
When you refinance a mortgage, you’re adding to the amount of money you borrowed from a bank or other lender to purchase your home. This new amount is then rolled into balance on your mortgage. This means you won’t have a separate loan or line of credit payment to deal with—it’s all covered by your mortgage payment. “Mortgage refinancing is more structured than a HELOC,” advisor Josh Davie says, adding that this is an attractive option for many homeowners and often has the lowest possible interest rate, because it’s a first mortgage that is secured by the equity in your home.
It’s fairly easy to qualify for refinancing with your mortgage lender, our experts advise, but you should try to do it when your mortgage is up for renewal. Refinancing in the middle of your mortgage term may result in substantial fees. If the new rate is significantly lower, you could come out ahead, despite the fees; but you should ask your lender to crunch the numbers before you decide.
Refinancing a mortgage is a great option for those with a tendency to spend, as there’s less need for discipline, Phil Davie says. “You get a lump sum [loan, to cover the cost of your renovation] and the repayment is fixed. You can’t really abuse that money and you can’t get extra.”
If you add to your mortgage principal, you will owe more and, subsequently, you could have a higher monthly payment. However, if you add to the loan while locking into a lower rate, you may actually end up with a lower monthly payment (yes, even if you’ve borrowed more money). For example, if you originally owed $450,000 on your mortgage at 4% interest with an amortization of 25 years, your monthly payment would have been $2,375. If you added a $100,000 loan at the time of your mortgage renewal and locked into a lower rate of 1.8%, you’d owe $100,000 more but have a monthly payment of $2,278—slightly lower than your original monthly mortgage payment.
Unsecured personal loan or line of credit
You can apply for an unsecured personal loan or personal line of credit through most financial institutions, including banks and credit unions, as well as more expensive subprime lenders. A personal loan is a lump sum that you’ll repay with interest on a set schedule. A personal line of credit operates like a HELOC, with a limit you will continually regain as you repay the funds borrowed, but at a higher interest rate because it’s not secured to your home. The interest rates on personal loans and personal lines of credit are typically similar.
While this type of credit may come in handy in an emergency, Phil and Josh agree that it isn’t ideal for planned renovation expenses. Not only do these options come with much higher interest rates than secured forms of credit, you will likely have access to less money, which limits what you can do.
However, if you find yourself in a bind, an unsecured personal loan or line of credit with a reputable financial institution can be helpful. “If you can pay it off quickly, it’s better than using a credit card. But it’s not inexpensive or ideal for the average person.” While the interest rate on a HELOC may be the lender’s prime rate + 1%, interest on a personal loan might be anywhere from 6% to 16% or more, depending on the lender and terms, as well as your personal credit rating and existing debt load. The interest rate on a standard credit card will likely be 19% or higher.
The bottom line? In an emergency, a personal loan can be a lifesaver, but it isn’t ideal for most homeowners and should not be used for discretionary spending.
Borrowing money from a family member
A parent or other family member may offer to lend you the funds for your home renovation—and, while this may be tempting, advisors Phil and Josh typically advise against this option. “Technically, from CRA’s standpoint, the lender is supposed to charge interest based on a formula, but that rarely happens,” Phil says.
He views the potential for family conflict or tension as a major deterrent. “I would stay away from borrowing money from your parents, especially if there are a lot of siblings in your family. It can lead to uncomfortable situations. We deal with family estates all the time and we see this.”
What else should you be thinking about when borrowing funds for a home renovation?
A renovation can cost a lot of money, but it typically adds value to your home—something to consider if you have plans to move in the near future. “If you’re borrowing money on a HELOC or other form of credit to renovate, your home’s value should go up,” Phil says. “If you’re selling, this could be a great investment. But if you’re not selling, you still have to pay it back.
“Talk to a realtor about what brings the most value,” he advises. “We aren’t the experts there!”
Real estate value aside, a home renovation can bring a lot of personal satisfaction and improve your quality of life, as it did for Shannon and Calvin. Their end goal was simply to get more enjoyment out of their house, and they succeeded. Each of their three children now has their own bedroom, and they have a beautiful new living space for entertaining or relaxing as a family. “We love how the renovation turned out,” Shannon says. “It was definitely worth it.”
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