Financing Your Home Renovation

With the added upfront cost of purchasing a home, especially in the GTA, more homeowners are choosing to stay in their current homes and renovate them to suit their ever-changing needs. The biggest hurdle in most renovation projects is saving up enough cold, hard cash to finance those dreams of open concept floor plans and spa-like bathrooms. So, how do you do it? Having renovated four homes of my own, I’ll share my insight and experience. Before I do, here are a few things to keep in mind:

1. If it’s possible, it’s always best to save up the cash needed for your planned renovation, so that you’re not adding to any existing debt you may already have
2. If you’re renovating on credit, make a financial plan for how you plan to pay off your renovation, before you begin
3. I’m not trying to encourage anyone to renovate on credit, unless you have the means to pay it off as soon as possible

Now that I have that out of the way, here are some of my tips and tricks:

Purchase Plus Improvements

If you’re planning on purchasing a home that you know will need improvements to make it more liveable, or to your liking, why not try to get a mortgage product called Purchase Plus Improvements. Not only will the bank provide you with your actual mortgage for the property, they will also lend you the cash for the improvements, which is then calculated into your mortgage amount. There are a lot of rules and stipulations to this mortgage product so it’s best to consult with a mortgage specialist to see if this is right for you.

Refinance

Why not try a mortgage refinance on your property to get the cash you need to renovate your home? If you have a lot of equity in your home, then this might be a worthy investment, especially with the historically low interest rates we’ve been experiencing in Canada. Once again, I would advise you to consult with a mortgage specialist to see if this option is right for you and your situation.

Line of Credit

Have an existing line of credit (LoC) kicking around with a low interest rate that you’re not using? Then this option may be for you. A line of credit allows you to borrow the money and execute your dream renovation,now! But remember a couple things: 1) you will need to make monthly payments on your outstanding balance, and 2) you should have a plan to pay this off as soon as possible, otherwise it may not be worth using an LoC. This option could be best suited if you’re planning on selling your home after the renovation is done. By increasing your property value (granted you do the right renovations), you should be able to pay off the line of credit from the proceeds of the sale.

Big Box Store Credit Cards

If you’re planning on buying the majority of your material and finishes from one of the big box stores, like Home Depot and Rona, it may be worth looking into the credit cards these stores offer. For example, Home Depot offers consumers a credit card that differs interest for 6 months on purchases over $299. My philosophy is: if you can borrow someone else’s money for free, then why not? Again, as long as you have a plan to pay this off before the 6 months is up, because the interest rate is killer if you don’t. And don’t forget: just like with any credit card, you will still have to make your minimum monthly payments.

MBNA Credit Card

I’m sure you’ve heard of the 0% interest credit cards, only to find out later it was just to sucker you in, but with the MBNA credit card there really is no interest. This applies to balance transfers (using this card to pay off a high interest credit card) and cash advances. I highly recommend using it for the cash advance option, as they will transfer the available balance from the credit card into your bank account as cash, which you can then use for your renovations. You do have to pay a 1% fee, but it’s a small price to pay to borrow money for free. Once again, these promotions are usually for a 10-15 month period, so make sure you have a plan to pay back the money you borrowed before your time is up, otherwise you will get slammed with a high interest rate retroactive to the day you borrowed it.

There are other ways to finance home renovations, but these are my personal “go-to” choices. I always use a combination of money saved plus a few of these, to keep my cash flow open to pay for materials and contractors, ensuring a smooth renovation that stays both on budget and on time. Make sure to always assess your needs versus your wants and seriously consider your financial situation before choosing which option is best for you. It’s important to have a re-payment plan in-place, so you don’t rack up any additional debt with high interest. The last thing you want to do is regret taking that sledgehammer to your walls.

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The following article was written by Toronto real estate agent, Aleksandra Oleksak, a sales representative from Sage Real Estate.