You may be able to make your dream home a reality much sooner than you think by utilizing one of the many financing options available to Canadian homeowners. And borrowing to renovate is not necessarily just good for your lifestyle needs - it can be good for your bottom line too. Here we’re going to take an in-depth look at the numbers side of home renovation, and how you can start planning for your renovation project right away.
Home Renovation: The Costs and Potential Rewards
A home renovation can cost anywhere from $100 to $500 per square foot, depending on the type, scale, and focus of your project. Clearly this is a fairly broad range, so let’s put it into some context. The average spend on home renovations is around $12,300 per homeowner. But some renovations cost significantly more than others; bathrooms and kitchens, for example, tend to cost much more than landscaping or painting - but even though these areas are cheaper, they can still have a big impact on your property value. For example, a fresh coat of paint provides an average 60% return on investment.
Understanding your lifestyle needs and the potential return on investment of any prospective improvements, and finding the right balance between the two, is therefore very important. See here for more information on typical home renovation costs and returns in the Toronto area.
Understand Your Financing Options
Whatever focus your renovation project has, you need to make sure you have the funds in place to complete it. 39% of Canadian homeowners who recently completed renovations went over budget. Luckily, there are a variety of ways to finance a home improvement project, some of which even allow for changing budgets and timelines.
1. Use Savings
The ideal scenario is for a homeowner to have the cash in hand to perform any home improvements they desire; this is easier for small projects, such as repainting, but is unfeasible for most Canadians when considering larger projects. Having a savings buffer in the event of a budget overrun on an otherwise financed project is a more realistic approach.
2. Refinance Your Mortgage
One of the primary ways homeowners can access the capital needed for renovations is by refinancing their existing mortgage, to release extra funds which can then be used for the project. A refinancing can be with the same lender, or involve switching lenders, and can also involve switching mortgage type or interest rate to get a better deal. As interest rates on mortgages tend to be much lower than for other loan types, this is one of the most affordable ways to finance a big renovation project.
3. Take Out a Second Mortgage
If refinancing isn’t an option, you may be in a position to take out a small second mortgage with a lender other than your primary mortgage provider. Bear in mind this means you’d need to make repayments on both mortgages, simultaneously, and the amount you can borrow will depend on the amount of equity you have in the home. Interest rates on second mortgages tend to be higher than on primary mortgages too.
4. Release Equity via a Reverse Mortgage
For older Canadians who own their home outright, a reverse mortgage allows access to the equity in a home without needing to sell it. Reverse mortgage holders are essentially borrowing against their equity, but don’t have to worry about repayment until the home is sold or the mortgage holder dies. This is a great option for retirees looking for a lump sum to improve their home while still living in it.
5. Use a Home Equity Line Of Credit (HELOC)
Home equity lines of credit (HELOCs) are one of the most popular forms of borrowing in Canada; this is a loan that’s secured against your home (like a mortgage) but rather than being a fixed sum of money that must be paid back via regular, pre-set repayments, it acts like a credit card. You will have a credit limit, set by the lender, and you can borrow any amount up to that limit, at any time. You only pay interest on what you borrow, and you can repay flexibly. And the credit is revolving - once you’ve paid the balance off, the credit becomes available to use again.
This is a great option for homeowners who are not sure of their home renovation budget or timeline, and who want flexibility. Just bear in mind: most HELOCs in Canada have a variable interest rate, so the cost to borrow can change quite a bit depending on market conditions.
6. Take Out a Personal Loan or Line of Credit
If you don’t have enough equity in your home to access low interest secured loans, then a personal loan or line of credit may be an option. The amount you can borrow with an unsecured personal loan or line of credit will vary hugely, depending on your income, assets, other debts, and which lender you choose. Just be aware that this type of borrowing usually costs more than a secured loan, so it’s less suitable for really big renovation projects or long repayment periods.
7. In a Pinch: Put It On Your Credit Card
Similarly, you may be able to pay for your improvements by credit card; this is really quite an expensive way to access funds, so it only makes sense if you are borrowing a small amount, intend on paying it back from another source really quickly, or, ideally, both.
8. Maximize Government Grants
Lastly, don’t overlook funding options from the government to help maximize your budget. Most government grant options are aimed at seniors, low income households or those with disabilities, and usually the renovation projects covered under these programs need to be ‘essential’ and functionality-related. However, there are also rebates and incentives for renovations that make a home more energy efficient or sustainable. You can find a list of these programs here.
Source: Statistica
Each Home Is Unique, So Do Your Math
No two homes are the same, so it’s important you understand the cost and potential return (both financial and non-financial) of any home improvement project, before you start. You can find out more about maximizing your home’s value while enjoying its comforts by connecting to one of Sutton Group’s realty experts.