The Loans Canada team sits down with Gary Schwartz of the Canadian Lenders Association to talk about open banking.
Concerned About Cash Flow During A Home Renovation?
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Canadian homeowners spend big bucks on improving their homes, whether it’s to improve 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 involved.
Considering the cost of certain home renovations, many homeowners simply don’t have the funds available to cover the cost of the project in full. That’s where financing comes into the picture. Specifically the use of the equity in your home to fund a home improvement project to take advantage of lower interest rates and easier loan approval.
Not only do financing options using your home equity help you gain access to the money needed to cover this large expense, but they can even help to keep your cash flow situation healthy.
Why Financing Your Renovation With Your Home Equity Makes Sense From a Cash Flow Perspective
A home renovation loan can help you avoid severely draining your cash flow reserves in the following ways:
Avoid Spending A Lot Of Money At Once
Considering the cost of a home renovation, you could be draining your bank account if you pay for it out-of-pocket. With a home renovation loan, you can pay for the cost of your project in smaller installment payments, while leaving much of your bank account untouched.
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 the home renovation project on plastic and deal with the bill at the next billing cycle. 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 renovation 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.
Other Benefits of Financing Your Home Renovation With Your Home Equity
Besides leaving your cash flow intact, there are other perks to using your home’s equity to finance a home renovation expense:
Add Equity To Your Home
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.
Check out these homeowner tax rates you can benefit from.
Types Of Home Renovations
There are several ways to improve your home to boost its esthetics, functionality, and value. The following are some of the more common renovations you may want to consider when revamping your home:
- Kitchen Renovations – The most popular room in a house for renovations is the kitchen and for good reason. This room tends to be the focal point of a home. Whether you’re looking to improve the look of the space for your own tastes or to get it ready to sell, the kitchen may be the best place to start in terms of updating.
- Bathroom Renovations – With bathroom renovations, you can go as in-depth as a total gut job by replacing all aspects of the space — including plumbing and electrical wiring — or as simple as simply refacing the vanity or tiling.
- Basement Renovations – Renovating your basement is a great way to add a lot more usable space to your home. You can then use your basement as a rec room, gym, home office, in-law suite, or even a basement apartment to help you pay off your mortgage.
- Additions – Another way to add more usable space to your home is to add to it. If you don’t have any current space in your home that’s not being used, you may have little choice than to build an addition to get that extra square footage. Additions can come in the form of an extra level or can be built out from the existing structure if your lot has the room to accommodate it.
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. Look into projects that bring in the best return on investment, which typically include replacing the front door, adding new hardwood flooring, repainting your home, and updating your kitchen or bathroom.
Add A Rental Suite
To help you pay off your mortgage, you may consider renovating your basement into a separate apartment. The rent you collect every month can go toward your mortgage so you can be free from a home loan sooner rather than later.
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 for more modern options that will help make your home a more eco-friendly one.
The components of your home are not always built to last a lifetime. It’s customary for different aspects of your home to require repairs on occasion. In some cases, these repairs are more esthetic in nature, but in others, they can be a safety hazard, such as faulty wiring or leaky roofs. In these situations, repairs may be necessary.
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.
How Can You Finance Your Home Renovations?
Regardless of your reason to renovate your home, the project can be an expensive one, and perhaps you may not have the funds needed to cover the cost entirely. In this case, financing may be an option. Here are a few financing options available to help you pay for your home renovation project.
A personal loan is usually an unsecured loan, which means there is no asset of value collateralizing the loan. Unsecured loans are riskier for lenders because there is no collateral, which is why they may require more stringent borrowing requirements, such as a strong credit score and high income.
Lenders may also charge higher interest rates to offset the added risk, so you can expect to pay a little more for a personal loan than you would for other loan types.
A second mortgage 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. The funds borrowed would be repaid in installments, typically interest only and term available is usually one year.
Second mortgages are great for those who already own a home and have some equity in them, as these loan types may require a minimum of 20% equity to qualify. You can then spend the money as you see fit to make improvements to your home.
Home Equity Line of Credit (HELOC)
A HELOC also works by using the equity you have in your home. But rather than taking out a lump sum of money and paying it back in installments over time, you would be approved for a specific credit limit within which you can withdraw funds from your home’s 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.
If you’re not interested in applying for external financing to cover the cost of a home renovation project, then you may want to look into a contractor loan.
The contractor who is renovating your home may offer you this type of financing, which would be backed by a private lender or your bank. Loan approvals are usually faster than other traditional loan types, and you may be able to qualify for a higher loan amount.
If you go this route, compare the contractor’s financing terms and interest rate to other loan options from banks or private lenders to ensure you’re not being charged any more than necessary.
If you’re considering improving your home and don’t want to drain your bank account to pay for it, you may be able to use your home equity to finance the project. Not only can your equity help you avoid having to come up with a lump sum of money on your own, but it can also help ensure that your cash flow isn’t significantly impacted.
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