Last updated August 28, 2023
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.
On this note, there is a metaphor or story called the "boiled frog syndrome" which cautions people to be aware of even gradual changes in their environment or surroundings lest they suffer eventual undesirable consequences. In this case, the reference is to the inability to sell your home when you need to, and as an argument against living with the creeping normality of a decaying unmaintained property. So why wait until you are going to sell to improve your property? Do it now and enjoy it!
So the third reason to renovate a property is to retain or increase its value. According to Scott McGillivray, television host of Income Property and author of How to Add Value to Your Home, property values increase in two ways:
I like Scott because he has a passion in educating homeowners to make smart renovation and investment decisions that deliver financial rewards. Regarding 'forced appreciation,' he says you can build on your home investment as the market appreciates, and protect the value in a declining market.
More about 'smart improvements' later on this page. Let's look next at the way people can finance these improvements.
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 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. Some examples:
In all of the above, the trick is keep the renovation small and understand what it is going to take on your part to repay the debt in a given time frame. Understand whether you need a structured repayment obligation or have the discipline to make more than minimum payments if not!
Here's an example: you intended your renovation to be only $15K but you end up with $24K on your credit cards because the project got away on you with all the bells and whistles. To repay the entire balance over 2 years you would need the discipline to 1) never use the card again, AND 2) pay ~$1220/month for next 2 years, bring total cost of renovation to over $29K! Could you even afford an extra $1220/month?
A structured repayment plan or "installment loan" means the same monthly payment for a fixed term, say 5 years, and might be at a lower rate, say 7%, which might mean on your $24K project a $475/mo payment for the next 5 years and a similar $29K outlay. If you do end up with large credit card balances after a project, you could always talk to your bank about a 'consolidation loan' to convert the credit card debt into a lower interest rate product with a structured repayment plan to make it easier to pay back.
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 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.
Below, we are going to talk more specifically about the Refinance Plus Improvement and the Purchase Plus Improvement loan products, why they are popular, how they work, and requirements for success.
Meanwhile, if you have any questions please contact us. If you are not quite there yet, please read on!
As licensed professional mortgage brokers, we know exactly what it takes to qualify you for a mortgage and we do more than just get you a great mortgage at a great rate, we will show you the way, too.
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 approve financing 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.
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:
Important - In addition to the considerations on this page, please make sure you can mortgage-qualify under the new rules!
"To mortgage qualify, you need sufficient Income, Credit, and Equity (I.C.E.)"
With the help of their Realtor, Mark and Sheila find a house they would like buy in an excellent location, but it is 25 years old and the roof needs replacing, the window seals are gone, and the kitchen is outdated. They have enough money for the minimum 5% down payment, but not enough for the renovations. Their Realtor tells them about the Purchase Plus Improvement program, so they negotiate a purchase price of $500K, which reflects the current condition of the home.
Immediately upon the accepted offer and working with their experienced mortgage broker, they contact a window contractor, a roofing company, and a kitchen contractor to visit the property and write them up detailed quotes. Within a few days, the quotes come in: windows are $10K (average $1K a piece), the roof is $9K, and the kitchen comes in at $25K, so $44K in total. A mortgage request is made to borrow 95% of $544K (purchase price + quotes) and the mortgage is approved subject to confirmation of the "as-improved" value of the home by a licensed appraiser. An appraisal is ordered.
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 $550K. The mortgage is approved based on the $544K value (always lesser of cost or appraisal). On the possession date, the lender will advance $516,800 (95% of $544K) to the client's lawyer with instructions to hold-back $41,800 (95% of $44K) until the improvements are complete. The buyers provide the lawyer with the other 5% of the $544K, representing their down payment.
As soon as their purchase transaction is approved, and prior to the actual possession date, the clients schedule their contractors to begin the work as soon as they have the keys. The contractors each require a 25% deposit, with the balance due on completion. Mark and Sheila don't really have the required $11K (25%) deposit and the bank doesn't pay until the work is complete, so they hit up the "Bank of Mom & Dad" to spot them the money as and when required by the contractors until their project is complete, bank-inspected, and the lawyer releases the $41.8K in hold-back funds.
A Refinance Plus Improvements is very similar to the above, except that the home is already owned, and the clients must have at least 20% equity in the property, meaning their existing mortgage balance must be no greater than 80% of the current "as-is" appraised value of their home. All the other steps would be the same.
Across Canada, renovation grants and rebates are available from the federal and provincial governments and local utilities, especially for energy-saving renovations. If you qualify, they may help pay for some of your project’s costs. See our Green Home Financing page for more details.
As professional mortgage brokers, we can clearly explain your home improvement financing options. Large or small project, we have access to a vast network of mortgage lenders to find you the right mortgage at the right rate for project, whether purchase or mortgage refinance. Mortgage renewal time is often the perfect opportunity to review your options, so if you want to wait until then please feel free to register your mortgage renewal date and we'll touch base then.
If you are ready to get started on your home improvement project right now, please contact us, and we'll get your questions answered and the ball rolling.