Home Improvement Loans

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. 

Types Of Home Improvement Financing Options

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. 

Unsecured Personal Loan

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. 

Benefits Of A Unsecured Personal Loan For Home Improvements

  • No Collateral Required – Unlike secured loans, there is no collateral, you don’t have to risk your home or vehicle to access the funding. As an unsecured loan, there is less risk to your actual assets, but the interest rate will depend on your merit as a borrower. 
  • Affordable Interest Rates – The lower your credit score, the higher your interest rate will be. So long as you can showcase your ability to make the loan payments, and good borrowing history, the interest rate should be affordable. 
  • Fast Funding – In most cases, you can access funding efficiently, since there is no collateral processing to acquire the financing.

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 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 Of A Credit Card For Home Improvements

Benefits to using your credit card depend largely on the type of card you’re using. 

  • Low APR Promotion – Sometimes, you can find a card that offers a low APR promotion, meaning you can get away with less interest. However, even a low APR will typically still be higher than the interest on a personal loan. 
  • 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. 
  • Small Payments – Another good solution for smaller improvements, 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 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. 

Benefits Of A Cash-Out Mortgage Refinancing For Home Improvements

  • Low-Interest Rate – The advantage of this type of home improvement loan is that it comes at a low-interest rate and uses an asset you already have. 
  • 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, it practically pays for itself. That is, if the boost in property value through the home improvements is high enough to outweigh the cost of the loan. 

Home Equity Line of Credit 

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. 

Benefits Of A Home Equity Line of Credit For Home Improvements

  • Revolving Credit – A unique feature of a HELOC is that it is a revolving form of credit, meaning you can use the necessary amount, provided it falls in the withdrawal period. 
  • Flexible Use – The funds can go toward home renovations, though you can also use them for incidentals. Ensure that, when you take funds out using the line of credit, you are able to repay the borrowed amount with interest. A flexible type of funding, it offers a lot of benefits in terms of convenience. Be cognizant of the fact that a line of credit done through home equity still leverages your residence. It may be convenient, but the cost of failure to repay is drastic. 
  • Build Equity – The better your renovations are, the more equity your home will accumulate, as you’ll be boosting its value along the way. 
Lookout Why You Should Never Skip A Home Inspection In Canada

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Using A Home Improvement 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
  • Lay down new flooring or carpeting 
  • Add a new coat of paint or wallpaper

What Are The Requirments To Be Eligible For A Home Improvement 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. 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:

  • Employment – Lenders generally require you hold a stable job. This is to ensure you’ll have steady income and thus the means to pay the loan.
  • Increase Income – Before applying, try getting a side gig to increase your income level. The higher your household income, the better your chances of qualifying.
  • Debt-to-Income Ratio – Lenders will generally not lende to you if your debt to income ratio is too high. Try paying off any smaller debts that you haven’t already paid off to increase your chances of approval.
  • Collateral – If you’re applying for a personal loan, you can offer up an existing asset (vehicle, other property, etc.) as collateral for the loan. You can also ask a stronger candidate to cosign your loan application for extra security.

Check out this guide on loans in Canada.

How To Apply For A Home Improvement Loan

4 Steps To Get A Home Improvement Loan

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. 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.

2: Look at Interest and Monthly Payments

In order to determine the actual interest rates for which you qualify, the lender will have to do a soft credit check. This shows up on your credit report and dings you a few points (though far less than a hard credit check, its more comprehensive counterpart). So as to reduce the damage, be sure to know the amount you will need for the project. Consider all aspects of the improvement before settling on a number. Include an amount for incidentals when making your total. Use this information to find out what loans you prequalify for, and their terms and monthly payment requirements. Find the most desirable option and move on to the next step.

3: Get Your Documents Ready

Though every company has their own requirements for your loan documents, you will still need some standard paperwork. The lender will likely ask for your previous tax returns – or at least your T4 statements, a credit report, and bank statements. Additionally, you will need proof of homeownership along with government-issued identification. If you are doing an in-person meeting, be sure to ask about the documents required ahead of time.

4: Submit Your Application

Once you have all of your paperwork together, you can submit your loan application. In most cases, you will receive a response within three business days. It helps expedite things if you are preapproved for the loan through that lender. Once the application is approved, it can take up to ten business days for the funds to arrive. If there is any urgency in receiving the money, communicate your concerns ahead of time so that you can manage your expectations.

What Can You Do To Increase Your Chances Of Getting A Home Improvement Loan?

  • Save – Regularly dedicate a portion of your income to a tax-free savings account.
  • Review Your Credit – Request a copy of your credit report from both Equifax and TransUnion to see where you stand. If you 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 ReportDispute 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 Improvement Loan?

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. 

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. 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. 

Home Improvement Loan FAQs

How much money can I borrow to renovate my house?

The actual amount of money you can borrow depends largely on the loan type you pursue. If you use a credit card, you are restricted to the credit limit on the account. Home equity loans leverage the amount of your home you own, so the amount depends on the home equity amount. Personal loans rely on your income, credit, and debt levels.

Are home renovations tax-deductible in Canada?

Home renovations are not tax-deductible, but there are tax credits available. All Canadians can access the Home Renovations Tax Credit, a nationwide credit that has a value of 20% of any amount over $2,500. Some programs are provincially specific, such as the Saskatchewan home renovation tax credit. Quebec offers a similar credit for eco-friendly renovations.

Should I save or get a loan for my home renovation?

When you already have a mortgage on your property, adding another credit product to your profile may not be the best move, as it can increase the number of payments and interest on your plate each month. So, if you’re planning to make smaller renovations, using up the funds in your savings account may be a better choice.

Can I add home renovation costs to my mortgage? 

Yes, if you’re buying a house that requires renovations, you can get a purchase plus improvements mortgage, which allows you to add in the costs of the renovation into your mortgage.

Making Your Home Renovation Dreams A Reality

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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