Financing the renovations for your house, condo or cottage is crucial before you can give your project the green light. Here are some ways to finance your home improvement projects.
Whether you want to update your kitchen, expand your bathroom or refresh your basement, home improvements are costly and you have to plan for them.
Louis-François Ethier, Mortgage Director with National Bank, hones in on the best strategies to adopt before applying for a loan for a renovation project: “There are two key options that homeowners should consider: Mortgage financing and a personal line of credit.”
1 Mortgage loan: Purchase plus improvements
For someone who is about to purchase a property and undertake renovations in the near future, the most advantageous solution is to buy with the renovations in mind. “This strategy involves integrating the cost of renovations into the initial mortgage loan,” explains Louis-François Ethier.
Our expert gives the example of a person looking to buy a house worth $200,000. “If she has a $20,000 down payment and wants to allocate $30,000 to renovating the kitchen and bathroom, she could get a mortgage loan of $210,000.” To calculate the loan, you subtract the amount of the down payment from the sale of the home and then add the estimated renovation costs.
A strategy like this has two major advantages: You can amortize your reimbursement over several years by adding the amount to your regular mortgage payments and you can take advantage of interest rates that are generally more favourable than any other type of unsecured loan.
Louis-François Ethier adds that people who consider tacking renovation costs onto their mortgage loan must confirm that the work has, in fact, been done. That means providing their financial institution with invoices detailing the cost of the renovations and/or purchases or submitting a post-renovation inspection report—prerequisites for getting the renovation loan in the first place.
2 Personal line of credit
Another interesting option, particularly for smaller jobs, is to secure a personal line of credit. “This is an excellent strategy,” says Louis-François Ethier. “It’s very flexible solution. You can access the funds whenever you need them and you only pay interest on the amount that you use.”
Another good thing about a line of credit—once it’s authorized—is that you don’t have to produce any proof of the renovations that you’ve done. What’s more, when you renew your mortgage, you can refinance the amount owing on your line of credit if the value of your property is high enough.
In addition to these two solutions recommended by our expert, there are other ways to increase your cash flow to offset the cost of renovations.
Just like condo owners who have a certain amount transferred to a contingency fund every month, Louis-François Ethier suggests opting for systematic savings. “Having a cushion enables you to deal with unforeseen events more quickly and instils excellent financial habits. No one wants to stop their kitchen renovation partway through because they’ve run out of money.”
A solution like this is even more practical when inevitable maintenance work crops up that doesn’t have a real aesthetic value, like redoing the roof, replacing the windows or updating the chimney to be compliant with environmental norms.
There are several provincial and municipal programs that subsidize various types of renovation projects, including those that are green or energy-efficient. When you apply, make sure that these programs are still in effect and that your project meets the eligibility criteria.
Because of their higher interest rates, credit cards should be used as a last resort to deal with unexpected circumstances or to undertake minor renovations. If you have a rewards credit card and you pay the amount back quickly, there may even be advantages to using your credit card in certain situations.
One thing’s for sure: For those who suspect that they’ll have trouble repaying the outstanding balance in full, Louis-François Ethier advises opting for a personal line of credit instead. Its lower interest rates make it a smart choice.
Plan for the unexpected
While you’re getting all of your funding lined up, make sure that you apply for the necessary permits. Set up a contingency fund for unexpected events, including falling for a beautiful fabric or tile that you suddenly must have.
If you’re handy with a saw, a hammer or a paintbrush, take on some of the work yourself to keep costs down, which, in turn, will reduce the financing you’ll need to do your renovations. Just be sure that your competence level meets your expectation level—and that of future buyers—when it comes to the end product.
If not, take the time to get quotes from different contractors. Compare them. Get informed. Ask as many questions as possible. This kind of legwork may end up being the best investment that you make all year.
Transform your renovations into an investment
Some people like to follow trends and others like to set them. In both cases, renovate with an eye to potential resale value. Make decisions based on your personal taste and on the needs of potential buyers. It’s important that all of the work you do adds value to your home.
Enjoy without stress
It’s a well-known fact that construction sites can be a significant source of stress. Get your financial worries out of the way at the outset by opting for the best financing solution for you, and you’ll be good to go.
To facilitate your experience, you may want to consider talking to a financial planning expert. “When you undertake the kind of home renovations that necessitate a loan, take the time to meet with a financial advisor,” adds Louis-François Ethier.
Want to learn more about real estate?
For more information or to make an appointment with a Mortgage Development Manager, please visit the Mortgage Financing Advisors section of our website.
The contents of this article are provided for information purposes only, and are not comprehensive. They do not create any legal or contractual obligations for National Bank or its affiliates. For information on your financing options, please consult your National Bank real estate specialist.
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