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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.

What Is 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. 

Why Using Home Equity To Finance Home Renovations Makes Sense

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.

Doesn’t Drain Your Bank Account

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. 

Lower Interest Rate Than A Credit Card

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. 

Invest Your Savings, Don’t Spend It

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.

What Do You Need To Borrow From Your Home Equity To Finance A Home Renovation?

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.

How Home Equity Can Help Finance Home Renovations

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. 

Home Equity Loans

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. 

Looking For The Right Home Equity 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.

Alpine Credits

Benefits Of A Home Equity Loan 

  • Versatile. You can use the funds from a home equity loan for just about any purpose, including renovating your home.  
  • Predictable payments. A home equity loan is repaid in installment payments with a fixed rate, which means your payments won’t change and will be easier to budget for. 
  • Low interest. Since your home equity loan is backed by your home, you may be able to secure a lower interest rate.  

Drawbacks To Consider  

  • Home is used as collateral. If you fail to keep up with your repayments on your home equity loan, you could risk losing your home, since it’s being used as collateral for the loan. 
  • Closing costs. Loans involving property typically require borrowers to pay closing costs, which usually range between 2% to 5% of the loan amount. 
  • Two mortgage payments. If you’re still paying your original mortgage, you’ll be adding another mortgage payment into the mix. That means two mortgage payments to have to cover every month.

Home Equity Loan Alternative: Home Equity Line of Credit (HELOC)

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.  

Benefits Of A HELOC 

  • Low payments. HELOCs require interest-only payments during the draw period. Not having to make principal payments can help keep payments low and maintain cash flow. 
  • High loan amounts. If you have a sizable amount of equity in your home, you may be able to access a lot of money through a HELOC. 
  • Consolidate debt. If you carry a lot of debt, you can use the funds from a HELOC to consolidate. You’ll be left with one, easily-managed bill payment, likely at a lower interest rate.  

Drawbacks To Consider  

  • Rates are variable. HELOCs come with variable interest rates, which means they can fluctuate at any time. During times of economic uncertainty, variable rates can be a bit of a gamble. 
  • Your home is used as collateral. Your home collateralizes a HELOC. If you don’t make timely payments, your lender could repossess your home to repay the debt.
  • Fees. There are various fees that you may be stuck paying on a HELOC, such as maintenance fees, inactivity fees, and transaction fees, to name a few.  

Other Benefits You Didn’t Know About Using Your Home Equity To Finance Home Renovations 

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. 

Home Renovations Can Add Equity To Your House

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. 

A Home Equity Loan Can Mean Tax Rebates

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. 

Home Equity Loans Can Have Lower Costs

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. 

Reasons You Should Renovate Your Home

There are different reasons why you may want to renovate your home, including the following:

Boost Your Home’s Value

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. 

Add A Rental Suite

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.

Make Your Home More Energy-Efficient

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 with more modern options that will help make your home a more eco-friendly one. 

Add More Space

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. 

Improve Your Home’s Aesthetics

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. 

Final Thoughts About Using Home Equity Loans To Finance Home Renovations

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.

Finance Home Renovations FAQs

What options are available to finance home renovations?

  Some financing options available to cover the cost of a home renovation include home equity loans, HELOCs, credit cards, contractor loans, personal loans, and personal lines of credit.

Can I finance my furniture in-store? 

You may be able to finance your furniture directly with the store you’re buying from. Furniture stores like The Brick, Leon’s, or Urban Barn, offer in-store financing by partnering with lenders to help finance your loan. Many stores may even offer zero interest during a promotional period if you qualify. 

Will a home renovation increase my home value?

Yes, a home renovation can significantly increase the value of your home, however, the increase in value will depend on the quality and type of renovation. According to a report by the Appraisal Institute of Canada, renovations that provide the best ROI are kitchen renovations, bathroom renovations, updating decor, decluttering and painting the interior/exterior of the house. 
Caitlin Wood, BA avatar on Loans Canada
Caitlin Wood, BA

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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