"Smart renovations not only improve the utility and value of your property, they can also protect the value in a declining market or make it easier to sell." - Scott McGillivray
There are a number of reasons to renovate a property, including:
Increasingly, Canadians prefer to relax, socialize and work at home. Renovation offers tremendous opportunities to create a home that reflects the way you like to live and contributes to your enjoyment of life, whether utility or comfort features, energy-saving modifications, or even to achieve a grander sustainable living objective.
Secondly, many people undertake renovations to make their property more attractive to sell. Carefully selected and dependent on market conditions, these renovations can make sense whether in speeding the sale of a property or fetching a better price.
The third reason to renovate a property is to retain or increase its value. Property values increase in two ways:
Rather than purchasing a new built home, many of our clients are purchasing an existing home in a desirable location, and then renovating it to their style. Or they already own the property, and want to modernize it. This could entail something as simple as adding hardwood floors, or as detailed as complete basement renovations.
Earlier we talked about "smart renovations." Lenders can finance home improvements based on the "as-improved" value of the renovations, which is different from and not necessarily the cost of renovations. This is an extremely important point to understand. Not all renovations result in an increase in the value of the property. Here is a Top 5 Reno List for Return on Investment.
Energy upgrades: Whether you’re thinking about new energy-efficient windows, a new furnace, or solar panels on your roof, energy upgrades are a hot trend in home building and renovations, and typically bring with them at least a 50 to 75 percent return upon resale not to mention years of energy cost savings.
Depending on the scale of your project, there are a number of ways to finance your home improvements. For simplicity, let's divide the expenditures into smaller and larger projects.
For smaller projects, you might want to consider paying cash or "personal" borrowing, meaning a home improvement loans and revolving credit that you get at a retail bank (TD, Scotia, RBC, etc.) and that are not tied or "secured" to any of your assets.Trick is to pay these loans back quickly. If you can't pay them back quickly, consider your projects to be larger projects!
For larger projects, you might want to consider borrowing based on the existing equity in your home, or the equity you can create doing smart renovations. In most cases where you already own the home, the maximum funds available are generally 80% of the appraised value of the property less the amount left to pay on your existing mortgage. Initial set-up costs may include legal and appraisal fees. Here are some options:
In items 4 & 5, the trick to a home improvement mortgage is creating "as-improved" value that exceeds the cost of the renovations is to make quality and consistent renovations throughout the house, which compliment each other and increase the value of the whole house in the eyes of prospective buyers, as determined in advance by a licensed property appraiser. Let's look at these last two in more detail.
Certain lenders allow us, as mortgage brokers, to help you obtain financing that provides for the purchase or refinance of the residence, plus additional funds for the “improvements”. Details are as follows:
Mike and Joyce have decided to start a family, and Joyce - now pregnant - will be leaving the workforce soon. As both want Joyce to stay home and raise the kids, they decide to create an "income suite" in the basement of their Calgary walk-out bungalow and use the rent from the tenants to help augment their household income.
They owe about $400K on their $500K property, so have about 20% equity in their home as-is. However, mortgage rules only permit them to borrow on home equity in excess of 20%, so it appears they have nothing available for renovations, or so they think until their mortgage broker tells them about the Refinance Plus Improvement program, which permits them to borrow based on the "as-improved" value of the home (after the value created by the renovation, that is!)
Working with guidance from their mortgage broker, they contact a general contractor experienced with income suites and Calgary home renovations in general, who works out a detailed quote for $40K. The $40K includes adding a new (lower) kitchen, a bathroom renovation, fire and sound separation from the main floor, disconnection from the furnace as the suite's heat source (they will use the in-floor heating instead), enlargement of 2 lower bedroom windows for fire egress, and new flooring.
Next, an appraisal is ordered to determine the value of the home "as-improved." With quotes and specs in-hand, the appraiser reviews the property and similar properties that have recently sold, and pegs the "as-improved" market value of the home at $570K. That's great, as they can borrow up to $456K (80% of the appraised value), and the owe $400K on their existing mortgage, so that leaves $56K for the renovations - perfect! (but there's a string ....)
The mortgage is approved based on the $570K value. On the mortgage funding date, the lender will advance $456,000 (80% of $570K) to the client's lawyer with instructions to pay off the existing mortgage of $400K, and hold-back $56K until the improvements are complete.
Here's the string. The contractor requires a 25% deposit before he will start, with the balance due on completion. Mike and Joyce don't really have the required $10K (25%) deposit, but they hit up the "Bank of Mom & Dad" to spot them the money as and when required by the contractor until their project is complete, inspected, and the lawyer releases the hold-back funds.
A Purchase Plus Improvements is very similar to the above, except that as the home is purchased, quotes are obtained, and the clients only needs to have 5% equity in the property. All the other steps would be the same. See a Purchase+ example on our website, and more information on this topic.
If you have questions on how to finance a home improvement project, we'd love to hear from you. Please contact us.
By the way, "smart renovations" are any renovations that add more in value then they cost to perform. Ask us for ideas. Kitchens and bathrooms are good examples. Stay tuned for our next blog with examples of home renovations Edmonton and bathroom renovations Edmonton.