Exploring the topic of renovation financing

There comes a time when things just start to wear out and you have to replace them.

Bigger ticket items like a new kitchen or new windows can be at the top of the list but finding the funds to do so can be hard when your monthly budget is so eaten up by your other bills.

This week we are going to look at how you can put together the financing you need to make your home reno dreams come true.

1. The first option you have is always a visit to your local bank to obtain a regular old loan. The plus side to this is the loan you take will likely be done within a five-year time frame as this will be an installment loan. The downside is that if you borrow $40,000 you could be looking at a payment of $800 a month on top of your regular bills which could be hard to adapt to.

2. The second option is an unsecured Line of Credit. These are available from your bank as well. The upside here is that the minimum payment is often only 1% of the outstanding balance which can be easier to stomach monthly. The downside is that if you make the interest only payments you will owe the balance indefinitely and pay an awful lot of interest.

3. The third option is a refinance plus improvements mortgage. This mortgage works like this.

• you get quotes for all the work you want to have done. These need to be for things which will stay with the home so new appliances do not fall within the guidelines.

• you call your existing lender to find out your mortgage penalty as we will be breaking that contract to put the new mortgage in place.

• we gather ALL the necessary documents to complete the mortgage application. Please keep in mind the lending landscape has changed in Canada and that list of documents is much longer than it used to be.

• an appraisal is ordered to determine the ‘as is’ and the ‘as is improved’ value of the home. The quotes for all the work have to be submitted to the appraiser at the time this is ordered to give the correct valuation. We cannot go higher than 80% of the improved value for mortgage financing as per the rule changes a couple of years ago.

• the day of funding the existing mortgage is paid out and the funds for the renovations are held in trust at the lawyer’s office until an appraiser visits the property to confirm the work is complete.

The upside to this product is that your monthly budget is not affected very much at all as the loan is taken over a longer time frame. The downside is that you will need to have access to some funds to bridge the gap between when you start the renos and when the funds are released from the lawyer. There are also the additional costs of legal, appraisal, title insurance and a mortgage penalty.

The other choice you will have to make at this time is which mortgage product you want. You basically have three options.

• a regular fixed rate mortgage where the term and payment are set.

• a variable rate mortgage where you will be given a rate which will be set as an ongoing prime less the discount for the term of the mortgage. A variable mortgage does have a penalty if it is broken but it is only three months of interest making it an attractive option.

• a Home Equity Line of Credit. There is a misconception out there that a HELOC is not a mortgage. This is not all accurate though. A HELOC is a mortgage like any other and has to be registered through a lawyer. We are also only able to go to 65% of a property’s value with this type of a loan though can pair it with a fixed or variable rate to go all the way to 80%.

So there you have it.

Renovation financing options for your consideration. As always a qualified mortgage professional is your first stop to explore all of the above in detail.

Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group.

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