By Paul Hudson
Published: Jan. 10, 2014
As television personality Mike Holmes says, “when it comes to financing a home renovation, people must remember to build smarter”.
For me, building smarter means financing smarter. Whether you are refreshing your home aesthetic with a new coat of paint or doing something more ambitious like building a rental suite, setting a budget before you start is the smartest thing you can do.
Budgets vary widely depending on the type of home renovation you have planned.
The three most common ways to finance your renovation also vary widely, so visualizing what your renovation looks like from start to finish gives you a clearer picture of what you are spending your money on.
1) A Mortgage Refinance – I call this the wild-west of renovation finance. Arranging your mortgage funds this way is relatively easy but I recommend proceeding with caution to avoid a scenario like the following – you meet with your mortgage advisor, your home value is determined, you then determine the maximum amount you can borrow, you decide to borrow the highest amount possible via a Home Equity Line of Credit (just in case you need more money than expected), your advisor suggests creating a budget, you agree with your advisor but because it’s not a requirement for your approval, your budget ends up loosey-goosey and your costs end up higher than expected (or worse, you end up borrowing money from other sources such as credit cards in order to complete your work).
Although obtaining funds in one lump sum at the beginning of a project makes life easier, what you must remember is every dollar borrowed will likely cost you an additional dollar in interest over the lifetime of your mortgage. Therefore this option is best suited for those who consider themselves financially savvy.
2) A Purchase With Improvements Mortgage – Let’s say you find the right sized house in a great location but it needs a few changes to make it feel like home.
Borrowing against the “as-improved” or future value can be done. This is an excellent option since you can finance up to 95 per cent of your renovation when you purchase. This is convenient if renovation costs are less than 10 per cent of the as-improved value of your home, since the renovation funds will be given to you on your closing date. Renovation costs exceeding 10 per cent are also acceptable but advanced in stages in order to ensure you stay on budget until completion.
3) A Construction Mortgage – This type of mortgage is most common for major renovation (examples include structural changes to your house or constructing an additional building on your property). In this scenario a financial institution will advance funds to you in stages to ensure you stay on budget and to ensure their collateral meets building guidelines.
Since the federal government only allows you to borrow up to 80 per cent of the value of your home once you own it, the new “as-improved” value of your property will be considered, which can make this a superior option to a traditional mortgage refinance.
The key to a home renovation is planning in advance and knowing what you want your home to look like before you start your work. Before you bust out your sledgehammer and tear up the shag carpets, ensure you know what your completed work will look like and confirm your financing is arranged in advance.
