Looking to make some improvements to your home? Want to know more about your home renovation loan options? No matter the purpose of your home improvements, the renovations are pricey. Especially when you factor in the cost of all the materials, labour, and potential permits that may be involved. The good news is that home renovation loans can help you finance all of those things over time.
We have all the information you need. From dealing with the debt burden to how your credit score may affect your application.
Key Points
- Many loan programs may be available to help you fund your home renovation, including personal loans, home equity loans, and store financing.
- Regardless of the loan option you choose, be sure to consider the interest rate, loan term, and loan amount.
- Done right, your home renovation project can add value to your home, which can make the money spent on updating it worthwhile.
Home Improvement Financing Options
Several financing options are available to choose from to help you fund your home renovation project. Deciding how to approach funding for your home renovations depends on your current financial situation and how you want to repay the borrowed amount. Each option has its own series of benefits and pitfalls, so the correct approach depends solely on your circumstances.
Unsecured Personal Loans
A personal loan is a standard loan option that provides a lump sum of money upfront, which can be used for various purposes, including home renovations. The funds are repaid via regular installments that include both principal and interest. You’ll have a certain amount of time to repay the loan in full.
An unsecured personal loan simply means you’re not using collateral to back the loan. Since there is no asset involved, the lender assumes a greater risk. As such, it may be more difficult to secure a lower interest rate and higher loan amount, unless you have excellent credit and a strong financial profile.
Benefits Of An Unsecured Personal Loan For Home Improvements
Unsecured personal loans offer a handful of perks when used to cover the cost of your home improvement projects:
- No Collateral Required – Unlike secured loans, there is no collateral with an unsecured loan, so you don’t have to risk your home or vehicle to access the funding.
- Flexible Use Of Funds – Unsecured personal loans are versatile, so you can use the money however you see fit, including paying for home renovations.
- Fast Funding – If you apply with an online lender, you can access funding quickly, sometimes on the same day of approval. Plus, since there is no collateral involved, processing the loan may be a bit quicker compared to a secured loan.
Credit Card
The revolving credit available through credit cards is another approach to financing your home improvements. Though not a typical source of financing, you can use the balance remaining on your credit card to fund your renovations.
The reason it is not a common approach is the high-interest rates on credit cards (significantly more than a personal loan). It can work for small payments, incidentals, or less demanding renovations.
The best way to determine if the credit card approach is correct for the situation is whether or not you can repay that balance in a month’s time. If not, you will be left with a hefty interest bill that can quickly snowball. To prevent this risk, stick to smaller expenses with your credit card.
Benefits Of A Credit Card For Home Improvements
The benefits of using your credit card depend largely on the type of card you’re using:
- Credit Card Rewards – Cards that offer points or cashback can offer advantages if you are able to repay the borrowed amount every month. An example of this is slowly funding a renovation, repaying the amount regularly, and reaping the advantages of the perks your card offers.
- Immediate Access To Cash – since you already have an active credit card account, all you need to do is tap into your account when the need for extra money arises. There’s no need to go through the loan application process and wait for approval and funding before you get your hands on the money.
- Small Payments – Another good solution for smaller renovations, your credit cards are beneficial because they allow you to make minimum payments when you can’t afford your full monthly balances. If you prefer, you can also make more than one payment per month, which will quickly increase your credit score.
Cash-Out Mortgage Refinancing
This type of mortgage refinancing involves refinancing your existing mortgage for more than the amount you currently owe. The difference is paid to you, in cash, by the lender.
The amount for which you qualify depends on how much equity you have in the home. If you’ve owned the home for a longer period, then you will have obtained more equity and can thus get a higher loan amount. If your home is valued at a higher amount than it was when you purchased it, then you can also use the difference to add to the home renovation loan amount.
Typically, you will need to leave a certain amount in the home, with many companies using a financing cap. Though the value will differ, it usually rings in at roughly 80%.
Refinancing might make more sense if you want to secure a lower interest rate and/or change your mortgage loan terms.
Benefits Of A Cash-Out Mortgage Refinancing For Home Improvements
Advantages of using the funds from a cash-out refinance from your mortgage are as follows:
- Low Interest Rate – The advantage of this type of home improvement loan is that it often comes with low interest rates since your home collateralizes the loan, which reduces the lender’s risk.
- Can Use The Money For Anything – You get the full borrowed amount in a lump sum, letting you choose how to apply that money to the project.
- Boost Property Value – By using a low-interest loan to add improvements to your home, you may see a boost in property value thanks to the updates made. If the increase in value outweighs the cost of the home improvement project you undertake, you’ll be making a sound investment.
Home Equity Line Of Credit
Another common type of home improvement financing is taking out a home equity line of credit (HELOC). This involves using the equity in your home as a lien for the loan. As long as you have enough equity in your home, you may be able to qualify for a HELOC and use your home’s equity to fund your home improvement project.
Benefits Of A Home Equity Line of Credit For Home Improvements
Using a HELOC to fund your home renovations include the following:
- Revolving Credit – A unique feature of a HELOC is that it is a revolving form of credit. That means you can withdraw as much or as little as you like at any time up to your credit limit, without the need to take out a lump sum loan.
- Flexible Use – The funds can go toward home renovations, though you can also use them for incidentals.
- Lower Interest Rates – Since a HELOC is secured by your home, interest rates are generally lower compared to other financing options, like unsecured personal loans or credit cards.
Store Financing Programs
Canada has several home improvement stores that offer contracting services to help renovate your home, like Home Depot and RONA. Many of these retailers offer in-store financing to help homeowners spread out the cost of their projects, much like a regular loan.
- RONA is partnered with Affirm, a Buy Now Pay Later (BNPL) service that lets you divide your purchase into 4 biweekly, interest-free payments, or split up the cost of your purchase into flexible monthly payments.
- Home Depot offers its Project Loan, which offers a 0% interest rate for 6 months on a loan up to $50,000, with the remaining term up to 60 months at a lower APR to help you repay your loan balance.
Benefits Of In-Store Financing For Home Improvements
Consider the following benefits of using a retailer’s financing programs to fund your home renovation project:
- Convenience – You can settle your financing right from the source when using a home improvement store to tackle your renovation project.
- Flexibility – A service like BNPL can help you spread the costs of your project without having to come up with the full amount upfront.
Using A Home Renovation Loan to Improve the Value Of Your Home
As previously mentioned, making renovations is a good way of improving the overall quality of your home. It’s also one of the most effective ways to drive up the value of your property, which will definitely work to your advantage if you’re hoping to resell it in the near future.
With an appropriate amount of financing, you can:
- Refurbish your kitchen
- Upgrade one or more bathrooms
- Replace a leaky roof
- Make repairs to the foundation
- Build expansions to the house
- Install new windows and doors
- Install new flooring or carpeting
- Add a fresh coat of paint
If you’re smart about the type of renovation project you tackle, you can bring in a higher return on investment.
What Are The Requirements To Be Eligible For A Home Renovation Loan?
Generally speaking, lenders will be more willing to approve you for a larger loan with a lower rate and a customizable repayment plan, as long as you can prove that you’ll be responsible with the funds that you would be borrowing. Lenders will assess the following factors when reviewing your loan application:
- Employment – Lenders generally require you to hold a stable job. This is to ensure you’ll have a steady income and thus the means to pay the loan.
- Income – Your income should be sufficient enough to comfortably cover loan payments. The higher your household income, the better your chances of qualifying.
- Debt-To-Income Ratio – Lenders will generally not lend to you if your debt-to-income ratio is too high. Even with a high income, if too much of your earnings are already tied up in your existing high debt levels, you may have difficulty securing a home improvement loan.
- Collateral – If you’re applying for a secured loan, like a home equity loan or HELOC, the lender will assess your home’s value and the amount of equity you have available.
How To Apply For A Home Renovation Loan
To apply for a home renovation loan, follow these steps:
Step 1: Investigate Your Options
The first step in making any financial decision is research. Take a look at the different lenders on the market, looking both at major financial institutions and alternative lenders. Use a comparison tool to see the rates available, like Loans Canada.
Learn about the different options available to you, including home equity financing, credit cards, or personal loans. Write down the best options from your research and proceed to the next step in the process.
Step 2: Get Your Documents Ready
Though every lender has their own requirements for your loan documents, you will still need some standard paperwork. The lender will likely ask for the following:
- Proof Of Income: your lender will want to ensure you earn enough to cover your loan payments, As such, they may ask for documents, such as bank statements, pay stubs, and tax returns.
- Proof Of Employment: A stable job is important, as it reduces the odds that you’ll be without work in the near future. To prove your employment, your lender may ask to see a letter of employment.
- Proof Of Homeownership: If you’re using a home equity loan or something similar to fund your renovation project, your lender may ask to see proof of homeownership, as your home will be used to secure the loan.
- Photo ID And Proof Of Residency: The lender will want to see proof that you are who you say you are and are a resident of the province you’re borrowing in. As such, you’ll need to show government-issued photo ID and a document with your name and address, such as a utility bill or lease agreement.
Step 3: Submit Your Application
Once you have all of your paperwork together, you can submit your loan application. Depending on the lender you apply with, you may get approved and funded in as little as the same business day. However, it can take a few days or longer when applying with a traditional lender.
What Can You Do To Increase Your Chances Of Getting A Home Renovation Loan?
To boost your odds of loan approval, consider these tips:
- Save Up – Regularly dedicate a portion of your income to a tax-free savings account. The less you have to borrow, the better your chances of getting approved for a home renovation loan.
- Improve Your Credit Score – Check your credit score to see where you stand. If your credit is really low, try increasing it before applying for a loan, preferably, until it’s within the “good” range (660 – 900).
- Check For Errors On Your Credit Report – Dispute any errors, signs of fraud or identity theft that you find within your report. This too will help improve your credit score, which will improve your chances of approval.
How To Choose The Best Home Renovation Loan?
In order to determine the best home renovation loan approach, there are a few major factors to consider that will directly impact the cost of your loan:
Interest Rate
This is a significant consideration since it is literally the cost of accessing the loan service. Naturally, the lower the rate of interest, the less you will ultimately have to repay. Your credit score and borrowing history go a long way toward accessing a desirable rate of interest. The better your score, the lower the interest.
However, even if you have a perfect credit score, be sure to shop around for competitive interest rates. Companies want your business, so check with a reputable online service to find out your options.
Loan Amount
The next thing to think about is how much money you’ll need for the loan. If you are simply redoing the roof, you may be able to take out only a few thousand dollars. On the other hand, if you are redoing your basement to pursue a tenant as a source of income, you will likely need much more. Some lenders deal only in smaller projects, so be sure to find a company that is willing to lend the amount you need.
Term Length
Finally, you should consider the duration of the loan. If you are concerned with monthly payment amounts, a longer term may be desirable. The longer the loan duration, the lower the regular payments. Though you accrue more interest in the long term, it serves to make the loan more affordable as you repay it.
Eligibility Requirements
Lending money is a matter of risk management, so the lender will look at a variety of different factors when determining if you are a safe borrower. The main thing that’s considered is your credit score since it is widely accepted as the yardstick of your borrowing credibility.
Alternative lenders, on the other hand, may look at other things such as income, employment history, or outside collateral like a vehicle. When you aim to determine the ideal loan, be sure that you qualify for it based on the lender’s standards.
| Can You Add A Cosigner? Especially if you have a subpar credit score, finding a company that enables you to add a cosigner is ideal. A cosigner is equally responsible for repaying the amount and is on the hook for the full amount. Provided you have someone with a better credit score, who is comfortable with these terms, it is a solid way to get a more desirable interest rate and can make qualifying for the loan itself easier. |
Other Ways To Help Finance Your Home Improvements
Besides applying for a standard loan program to help you finance your home renovations, other options may be available to financially assist you, as long as you can qualify:
Home Renovation Tax Credits
Several government programs are available that offer tax credits to eligible homeowners to help reduce the upfront costs of home renovations. Here are a few worth checking out:
| Federal Home Accessibility Tax Credit (HATC) | Claim up to $20,000 of total eligible expenses annually, with a maximum credit of $3,000 |
| Multigenerational Home Renovation Tax Credit (MHRTC) | Claim up to $50,000 in eligible expenses for renovations completed, which provides up to $7,500 in credits |
| BC Home Renovation Tax Credit For Seniors and People With Disabilities | Claim up to a maximum of $10,000 per year, resulting in a credit of up to $1,000 |
| New Brunswick Seniors’ Home Renovation Tax Credit | Claim up to a maximum of $10,000 per year, resulting in a credit of up to $1,000 |
Secondary Suite Incentive Programs
Secondary suites are self-contained units within or near your home, such as an in-law suite, nanny suite, or basement apartment. These units are becoming increasingly popular among Canadian homeowners, as they provide the opportunity to earn rental income or house other family members.
Whatever the reason for adding a secondary suite to a home, these projects are an expensive undertaking. Fortunately, various provinces and cities across Canada offer secondary suite incentive programs to help offset these costs, such as the following:
| Secondary Suite Incentive Program (Calgary, AB) | Receive up to $10,000 |
| Ontario Renovates Secondary Suite Forgivable Loan Program | Receive up to $50,000 as a forgivable loan |
| Secondary Suite Incentive Program (BC) | Receive up to 50% of renovation costs, up to $40,000 as a forgivable loan |
| Secondary Basement Suite Incentive Program (Newfoundland & Labrador) | Receive up to 50% of renovation costs, up to $40,000 as a forgivable loan |
| Secondary and Backyard Suite Incentive Program (Nova Scotia) | Receive up to 50% of renovation costs, up to $40,000 as a forgivable loan |
CMHC Improvement Program
The Canada Mortgage and Housing Corporation (CMHC) offers a financing program to homebuyers purchasing new construction or existing homes that need updating. With this program, you can get insured financing for 95% of the market value of your home after improvements have been made. Your home must be owner-occupied with one to two units to qualify.
Is Insurance Required When Renovating Your Home?
While home insurance is not mandatory in Canada, it’s highly recommended. Anything can happen to your home, including vandalism, theft, or damage from natural disasters and the elements.
Standard home insurance policies provide coverage for damages caused by these issues, within certain limits. It’s also worth ensuring that the contractors working on your home renovation come equipped with an insurance policy of their own.
That said, not all policies provide coverage to issues relating to home renovations. Damage may occur to your home while work is being performed, items can be stolen as a result of compromised home security, and workers can get injured on the job. Given these unforeseen but potential circumstances, it’s a good idea to have a home insurance policy in place that provides coverage for these possible issues.
However, not all home insurance policies include this type of coverage. You’ll need to check your policy or speak with your insurer to make sure you have all the coverage needed while your home is undergoing renovations.
Learn more: Do You Need Renovation Insurance When Renovating Your Home?
How To Finance Your Home Renovations For Accessibility
Renovation projects may be done to update a home, improve its function, or add more living space for additional family members. But another important reason to consider updating a home is to improve accessibility for household members with mobility issues.
Standard home designs do not typically take accessibility into consideration. From long flights of stairs to countertops that are too high, there are plenty of design issues that can be problematic for those who may be in a wheelchair or have other issues getting around. In this case, a few changes may be in order to make it easier for members of the family with mobility issues to get around more easily.
But like other renovation projects, updating your home to make it more accessible takes a lot of money. In much the same way you might finance any other renovation project, you can use the same financing options to cover the cost of accessibility renovations, including personal loans, home equity loans and HELOCs, and credit cards.
You may also be eligible for the federal government’s HATC program, as mentioned above. This is a tax credit that allows eligible homeowners to claim up to $20,000 of total qualifying expenses each year, which translates into a maximum credit of $3,000. This money can be used to offset the costs of making your home more accessible.
Final Thoughts
Suffice it to say, there are a lot of different considerations to make when applying for a home renovation loan in Canada. Plus, there are several tax credits and government-backed loan programs available to help offset these costs. Getting the right help can put your mind at ease and lead to the best loan conditions available. Loans Canada can help match you with a licensed mortgage broker to help you find the right home improvement financing to meet your financial needs.
Home Renovation Loan FAQs
How much money can I borrow to renovate my house?
Are home renovations tax-deductible in Canada?
Should I save or get a loan for my home renovation?
Can I add home renovation costs to my mortgage?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
