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How To Finance Home Renovations That Give A Good Return On The Investment

How To Finance Home Renovations That Give A Good Return On The Investment

Couple renovating their home

Couple renovating their home

Staring at that old kitchen counter from the 1990s that you wish you could change? Or wishing your basement could be turned into the entertainment center it deserves? Your dreams of home renovations may not be as far out of reach as you think.

Having a mortgage is like holding an investment account. Your home holds much of your financial wealth, which is your home equity. When you use the equity in your home to finance your renovations (by using a home equity loan or line of credit), you save on interest because these types of loans typically offer lower interest rates than you would get at the bank for a similar financial loan. In addition, the increased value of your home after the renovations might allow you to sell your home for more or obtain higher rental rates if you use it as an investment property.

Let’s dive a little deeper.

What exactly is a home equity loan?

Home equity is the difference between the current value of your home and how much you owe on your mortgage. The equity (or value) of a house may fluctuate over time as you pay down your mortgage, and market changes can alter this value. Using your home equity, in many cases, is better than taking out a traditional loan because you will more than likely be paying less interest, saving you more money in the long run.

What is a line of credit?

A secured line of credit (secured LOC) is backed by collateral, and many people use their equity as this collateral. When the lender has this kind of security behind a loan, interest rates are almost always lower, and you can access more money because you’re backed by your biggest asset: your home. A secured LOC will give you access to low-interest funds when you want that kitchen update or your basement oasis.

There are 4 main types of home equity loans in Canada:

A Second Mortgage is an additional loan taken out on a property that is already mortgaged. It is a lump sum of money that you can repay in fixed monthly payments over several years and with this loan, you don’t need to worry about payments increasing due to market changes. If you estimate exactly how much you need to fund your renovation, this may be a great option because you’ll receive all the money you need upfront. But just like with any loan, missing payments will hurt you financially. Since you are putting your house up for collateral, you risk foreclosure if you don’t make payments so be confident you will be able to make them accordingly, and on time before signing on the dotted line.

A HELOC (Home Equity Line of Credit) is a secured loan that is backed by your home. Your house is up for collateral, but because it’s a secured loan, you can qualify for a lower interest rate. The great thing about a HELOC is the revolving credit; this means you can take what you need, when you need it, up to the credit limit. Make sure you have at least 15% equity in your house to qualify to use it. It also has variable interest rates, so your payments could increase depending on the market conditions. Working with a mortgage broker can help determine if a HELOC is right for you.

A mortgage refinance allows you to borrow up to 80% of the appraised value of your home. The risk with refinancing your mortgage is that you may pay additional penalties or fees from breaking your original mortgage, and you may end up paying more for your mortgage than you were before, but the benefit is that you don’t have to take out a second loan. You are also more likely to access better interest rates.

A reverse mortgage is a tool typically used by older Canadians to fund their retirement in the event they aren’t receiving enough pension to live comfortably. It allows you to take money from your home equity without selling your home. When the time comes to sell your home, the money you borrowed is paid back to the lender.

If you have a project in mind, let’s get started by accessing your home equity to find out how much financing is available to you for those renovations you’ve been dreaming about.

With my expertise as a professional mortgage broker and financial advisor, I can help you decide if a home equity line of credit or one of the alternatives above is the right financial solution for you. Give me a call today at (705) 315-0516, or let’s schedule a chat to discuss your best options based on your current situation.

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