I live in a neighborhood built in the early 90s. Last year we replaced the roof at just under $10 grand, and this year we are looking at replacing our 25-year-old furnace at about $5 grand. Thankfully, our windows, kitchen, bathrooms, and basement had already been recently renovated by the previous owner because those are even more expensive undertakings!
For the record, I am a firm believer that maintaining your property and undertaking 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. This article is about the various financing options and home improvement loans to help you upgrade your home.
Key considerations if you need to finance are the scale and scope of your project, and what sacrifices you must make to repay the money. 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 loans and revolving credit that you get at a retail bank (TD, Scotia, RBC, etc.) such as credit cards, personal line of credit, home improvement loan, or a deferred payment plan. The trick is keep the renovation small, set yourself a specific time frame to repay the debt, and stick to your repayment plan.
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 (or equity) available is 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 for us Canadians:
1) HELOC or Home Equity Line of Credit - works much like a personal line of credit, typically at prime rate + 0.5% to + 1%, and you can borrow the money up to your limit whenever you want and repay as you wish. Requires discipline to repay the balance.
2) Mortgage Add-On (2nd mortgage) - this is a loan on top of your existing mortgage. You must repay this loan in addition to the required payments on the original mortgage. Could be less expensive than a HELOC, and offers up front cash and a structured repayment plan.
3) Refinance with Equity-Take-Out - this means you replace your existing mortgage with a new mortgage up to 80% of the property's “as-is” appraised value. Assuming you have some equity, you can end up with a lump sum of cash at the beginning of your project, and spend it as you see fit. You can also borrow based on the “as-if-improved” value of the property accessing some of your equity upfront and the balance of the newly created equity once the improvements are complete. If your mortgage is due for renewal soon and you’ve been putting off some renovations, the time is ripe to consider this option!
4) Purchase Plus Improvements - when you are buying a home, you can borrow extra money to be used for specific renovations as agreed to as part of the purchase mortgage financing. Renovations such as new roof, new kitchen, new bath, new windows and doors, etc. are excellent value-adding renovations more likely to be approved. Once the improvements are completed and inspected, you will be reimbursed by the mortgage lender, and you can accomplish all this with as little as 5% down payment.
If you are not sure which option is right for you, talk to a mortgage professional.