Being a Canadian homeowner certainly has its benefits. However, many ‘fixer-upper’ homes require a ton of work before they are 100% livable, such as new paint, plumbing, flooring, and roofing. Alternatively, you might just want to make general improvements or additions in order to brighten up your home or resell it at a profit someday.
No matter the purpose of your home improvements, the renovations themselves can be relatively pricey, especially when you factor in the cost of all the materials, labour, and potential permits that may be involved. The good news, this is where a home improvement loan can help you finance all of those things over time.
Traditionally, a home improvement loan is applied for through a bank or credit union, often times the same lender that holds your mortgage. If approved, you can use it to finance whatever renovations are on your bucket list, then repay your borrowings through equal installments.
All this said, finding the right type of financing for your next home improvement project doesn’t need to start and end with your bank, there are several other options to choose from.
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.
This sort of financing is generally accessible to most Canadians, provided that they have steady employment and good credit. You simply need to agree upon a loan term and an interest rate and the funds are transferred to you, the borrower, in full. In return, you make either monthly, bi-weekly, or even weekly payments to the lender. These include an interest charge, the cost of borrowing the personal loan. Bear in mind that, though there are promotions specific to home improvement loans, personal loan funds do not need to be used exclusively for home repairs or development.
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 that of 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 to using your credit card depend largely on the type of card you’re using.
This type of mortgage refinancing is when you refinance your existing mortgage for more than the amount you owe at present. 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 improvement 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 percent.
Another common type of home improvement financing is taking out a home equity line of credit. Also called a HELOC for ease of reference. This is when you use the equity in your home as a lien for the loan. In order to qualify, you need to have at least 15 percent equity in the home, though some lenders have higher standards and require a minimum of 20 percent. Provided you have paid off the mortgage representing this amount, you should qualify for a HELOC. The other aspect taken into consideration is the market value of your home at present. If it’s higher than when you took out the mortgage, it works in the borrower’s favour. However, if the home is worth less than when you purchased it, it is the exact opposite.
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:
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. As we said, the value of your home will also play a significant part in the approval process.
For the best chances of receiving approval and favourable conditions for your home improvement loan, it’s important to prepare your finances with some of the following steps:
Check out this guide on loans in Canada.
In order to determine the best home improvement loan approach, there are a few major factors to consider. Before you start, be sure that you have a realistic cost associated with the home improvement plan. Understand what it will cost, and factor eventual interest, incidentals, and changes in the market value of goods. Once you know how much you’ll need, and for how long you will require it, you can move forward, considering the key factors.
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.
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.
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.
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.
Especially if you have a subpar credit score, finding a company that enables you to add a cosigner is ideal. Many personal loan companies allow for this since it makes it safer to lend. 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.
Suffice to say, there are a lot of different considerations to make when applying for a home improvement loan in Canada. However, 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.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
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