*This post was created in collaboration with Alpine Credits
Canadian homeowners spend big bucks on improving their homes, whether it’s to upgrade functionality, enhance esthetics, or spruce it up for an upcoming home sale.
Regardless of the reason for making such improvements, there’s usually a lot of money needed to finance home renovations.
Many homeowners need a loan to cover the cost of the project in full. That’s where financing comes into the picture. Specifically the use of home equity.
Home equity is the portion of your home that you own. In other words, equity refers to the portion of your mortgage that you’ve paid off.
Home equity is calculated by subtracting your outstanding mortgage from the home’s current value. For instance, if your home is appraised at $750,000 and you currently have a mortgage of $350,000, your home equity would be $400,000. You can build home equity by paying your mortgage regularly and through home price appreciation.
Using home equity to secure a loan is one of the most popular ways to finance home renovations and for good reason. Tapping into home equity can help you manage cash flow and stay on top of all your financial obligations and goals.
Considering the cost of a home renovation, you could drain your bank account if you pay for it out-of-pocket. With a home equity loan, you can spread out the cost of your project. This will help keep your savings intact for any potential emergencies or unexpected expenses.
If you have a very high credit limit on your credit card, you may be tempted to pay for a home renovation project with that and deal with the bill later. But the interest rate you’ll pay on your credit card will make the cost of the project much more expensive than it has to be.
Credit card rates are often within the 20% range. You can get a much lower interest rate on a home equity loan, which means you’ll spend less at the end of the day.
Rather than dumping all your money on a home improvement project, you can invest it instead and let it grow. A high-interest savings account or a TFSA are both good options to store your money and let it grow tax-free.
To qualify for a home equity loan or HELOC, you need sufficient equity. Lenders typically require that borrowers have at least 20% equity in their homes to use the equity to finance large expenses, like home renovations. You may also require a good credit score to qualify.
There are different ways you can use home equity to finance home renovations. Depending on your needs and your current financial situation, one option will prove more beneficial than the other.
A home equity loan involves tapping into the equity you have built up in your home to be used as a loan. Since your home is used as collateral, you may qualify for a lower interest rate compared to a personal loan.
Alpine Credits helps homeowners get approved when looking to renovate their homes, deal with debt, cover unexpected expenses, or even pay for secondary education. If you’re interested in understanding your options, consider speaking with a mortgage specialist from Alpine Credits.
With HELOC you’re approved for a specific credit limit based on your home equity.
This revolving financing option works much like a credit card, whereby you can use as much money as you want, as long as you don’t exceed your credit limit. You’ll only be charged interest on the portion you use, and the funds can be accessed on an as-needed basis. As you make repayments, the money will be available again to be used when you need it.
Using your home equity to finance a home renovation is not only a savvy financial decision, it comes with added financial benefits you might not have thought about.
If you play it smart with your renovation project and its costs, you can add a lot of value to your home, which means more equity can be quickly added. More equity means more funding potentially available in the future if you ever need to take out a home equity loan or a HELOC to cover the cost of a big expense.
There may be some home improvement tax rebates available to you in your province. For instance, in Saskatchewan, the “Home Renovation Tax Credit” is open to homeowners, which can help bring down the cost of the renovation project.
Second mortgages tend to come with much lower interest rates compared to a traditional personal loan or unsecured credit card. You can save thousands of dollars in interest as a result.
There are different reasons why you may want to renovate your home, including the following:
Depending on the type of renovation project you undertake, you can add significant value to your home. This can be especially helpful if you plan to sell your home in the near future. Doing so can help improve your home’s look and functionality, which can bring in more money when you sell.
Just be sure that the project doesn’t cost too much more than you can recoup. Certain projects might be too expensive to take on.
To help make money with your mortgage and pay it off sooner, you may consider renovating your basement into a separate apartment. The rent you collect every month can go toward your mortgage or help you earn extra money for other expenses.
Just be sure that the improvements you make are in line with the local jurisdiction that you live in, as your basement apartment should be considered legal before you rent it out.
Older homes tend to be energy suckers, which can cost you a pretty penny in energy bills. A great way to cut down on the money spent on wasted energy is to make certain components of your home more energy-efficient. For instance, you may want to replace your windows, appliances, and even insulation for more modern options that will help make your home a more eco-friendly one.
As mentioned earlier, an addition can add some much-needed square footage to your home that you may need as your lifestyle changes over time. Whether you have a growing family or just need extra space for a home office or gym, an addition can be a great alternative to moving to a new home.
If your home’s finishes are still reminiscent of decades earlier, you may want to take on a renovation project to keep up with the times. In this case, you have plenty of options to modernize your home.
If you’re considering improving your home and don’t want to drain your bank account to pay for it, you can use your home equity to finance your home renovations. Financing your home renovations can be well worth it due to the potential value it can add to your home. According to the Appraisal Institute of Canada, kitchen renovations, bathroom renovations, updating decor, decluttering and painting the interior/exterior of the house, provide the best ROI.
Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.
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