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%). Today’s prime rate is 2.45%.
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.)