One of the major decisions on moving ahead on a renovation is how you are going to finance the project and sometimes it can be a challenge to find those extra funds. Here are some options to get you started.
#1. Equity financing
When you have enough equity in your residence, refinancing your mortgage is a cost-effective way to have funds available for renovations.
It's important to take into account that there may be penalties for paying out your existing mortgage prior to renewal. However, these penalties can be offset by a lower interest rate while accessing extra funds to put towards the home renovations.
#2. Using a line of credit
The home equity line of credit (HELOC) on your primary residence is another option to access funds. There are combination mortgage products available that enable you to have a portion of your mortgage in a fixed interest rate and another portion as a HELOC. The HELOC can be used for renovations, as a rainy day fund or for investment.
A HELOC enables you to access equity on a need-to basis while you only need to pay interest on the portion of the HELOC that you use. A couple of other benefits are that you can pay portion or all of it without a penalty and you only pay interest on the borrowed amount.
#3. Refinance plus improvements
Refinance plus improvements gives you the opportunity to do renovations to your home if you cannot exceed 80 per cent of your current property value due to lending restrictions. You can include the cost of the renovations into the mortgage up to 20 per cent of the property value to a maximum of $40,000, or 10 per cent of the as-improved value. You can refinance to 80 per cent and increase the mortgage to do renovations above the 80 per cent value, but it has to be shown that doing the renovations it will increase the value enough to keep the mortgage amount at 80 per cent once complete.
This is a great option when you make non-structural changes such as updating and renovating a kitchen or bathroom, installing new flooring, painting, finishing a basement, adding to a garage, etc.
#4. Private lending
A private loan is another option when you don't have enough equity or a HELOC to refinance your primary residence. Some private lenders can go to a higher loan to value of the property (LTV) compared to traditional banks.
These types of loans are for a short period of time, you will have to pay a fee and the interest rates are higher. However, once the renovations are complete, a traditional lender could be approached and refinance the entire mortgage or get a second mortgage with more favourable terms and pay off the private loan. The new mortgage would be based on the new property value after the renovations.
Additional Financing Options for Self Employed and Business Owners
When you are self-employed, it can be more challenging to obtain financing for you to purchase or renovate your home. However, there are other financing tools available that can help you purchase, renovate your home or simply get some extra cash for your business.
#1. Leasing and financing
Business owners can immediately take advantage of the benefits of the new equipment without using existing capital or credit, and continue growing their businesses. As an alternate credit source, leases don't interfere with established credit line, which, in turn, expands available working capital. There is leasing available for new and used equipment, software, machinery, vehicles, etc.
#2. Cash advance on future credit/debit card transactions
If your clients pay you with credit or debit card, this might be an incredible financing tool for you! The cash advance is a purchase by a third party of your future credit/debit card transactions and is paid back through a small percentage of all your future credit/debit card transactions. Advantages of this program: fast and simple approval, no collateral required, automated payment system and flexible payments.
With interest rates sitting at an all time low, now is an ideal time to tap into the available financing tool for your renovation or any other needs. But these rock-bottom rates won't be available forever the Bank of Canada estimates fixed mortgage rates will likely begin to rise sooner rather than later.
Consult a mortgage and leasing expert who will help you explore all the available options based on your specific needs and personal situation.