Renovation financing options
When it comes to home improvement, sources of inspiration are limitless. The funds in your bank account, however, may not be.
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Mortgage-based options Mortgage add-on New mortgage In fact, one should consider hiring a certified appraiser to get an estimate of the post-renovation value of the home. The appraiser's report will make it easier to convince a banker to lend the amount you need. The bank might even reimburse the value of the appraiser's bill. Illustration: Michel Rouleau The Schacter Team - Langley Real Estate
Fifty-three percent of homeowners use cash to pay for renovations, according
to an RBC Royal Bank/Ipsos-Reid survey conducted last fall. For those homeowners without the necessary cash on hand, banks and financial institutions, well aware of the renovation craze sweeping Canada, have developed loan products that are particularly suited to home remodelling projects.
Credit card or credit line?
Many do-it-yourself-ers use a credit card to pay for renovation materials. But these people should be careful not to leave the balance unpaid for too long, since credit card interest rates can be as high as -- or even higher than -- 18 per cent.
For projects that will cost under $25,000 or so, banks can often offer a line of credit. This is a practical solution when the homeowner isn't sure how much the project will cost, and he/she will pay interest only on the capital used. But the flexibility of a credit line comes at a price: Interest rates are generally higher than those for personal loans or mortgages.
The real estate boom has left many people in the position of owning lightly mortgaged houses that have soared in value. Financial institutions offer such individuals the option of using their home equity to borrow at low cost. A National Bank of Canada product called All-In-One Banking, for example, is a combined mortgage and credit line that enables homeowners to borrow up to 75 per cent of the appraised value of their property, less the outstanding balance of the existing mortgage.
No matter what the homeowner's credit rating is, the interest rate is the prime rate, or the rate at which the bank lends money to favoured customers. "It's a variable rate, but lower than mortgage rates," notes André Robidoux, senior manager of retail credit solutions at National Bank.
Similarly, BMO Bank of Montreal offers the Homeowner ReadiLine, which enables property owners to use their home equity to obtain an ongoing credit line that can be used for all mortgage and borrowing needs. Scotiabank's comparable product is called the Scotia Total Equity Plan, TD Canada Trust's is the Home Equity Line of Credit, and RBC Royal Bank's is the RBC Homeline Plan.
There is also the mortgage add-on route, which allows access to additional funds by simply adding them to an existing mortgage, based on the current appraised value of the home. RBC Royal Bank is one of the institutions where this feature has been automatically included in mortgages in recent years.
When faced with major renovation costs (more than $25,000), homeowners may want to negotiate a new mortgage, although they will have to pay a penalty to break their current contract. If the renovation might substantially increase the value of the property, bank personnel will take that into account when deciding how much to lend.
Personal Loan
If none of these solutions seems right, there is always a personal loan, although interest rates on such loans are generally higher than mortgage rates. In this category, Desjardins Credit Union offers Accord D Financing, which people can apply for at some branches or via the Internet. Some contractors also offer financing, but their interest rates can be high.