When picking how to finance your home renovation, don’t overlook the strength of your home’s own equity as a fountain of finance.
Since the money you spend renovating your home will help to boost its value, securing credit with your home equity is often a synergistic choice.
“Canadians like to be in control of their situation and when they want to renovate the home, they want to renovate it on their own terms. Leveraging your home to increase its value is a smart decision,” said John Turner, director of mortgages at BMO.
Small renovations can usually be handled by your credit card, but for large renovations that require a larger pool of resources, several long-term financing options exist. For comparison, Turner offers an example payment calculation for each option, assuming a home renovation requiring $25,000 of credit at the best possible interest rates for each choice.
A traditional bank loan can work, but it’s far from the most effective option. Bank loans tend to procure higher interest rates than other options and are only really useful if you know exactly how much money you’re going to need for your reno — an unlikely scenario since few renovations run exactly on schedule and on budget. Example payments: about $447 per month for five years.
A second mortgage is generally much more affordable than a bank loan, but it puts more long-term pressure on your finances. That’s about $152 per month for 25 years.
A line of credit offers a lot of flexibility, both in how much money you can access and how you can pay it off, but it can be expensive to handle. It works by granting you access to borrowing limit where you only pay interest on what you borrow, and you can secure it with your house as collateral to get more credit. That’s about $750 per month, going down as you pay off your balance.
The final option is a hybrid that Turner suggests is often the best option: a combination mortgage plus line of credit, usually backed by your home’s equity. As long as you start with either a 20 per cent down payment or 20 per cent of equity already built in your home, your monthly mortgage payments actually increase your borrowing reserve on a simultaneous line of credit. BMO is famous for its own version called the Homeowner ReadiLine, though a few other borrowers offer similar options. This is about $67 per month.
However you decide to finance your renovation, remember to always consider the big picture.
“You want to make sure you balance your short-term needs with your long-term wants and goals,” Turner said.
Upcoming home & design shows
Home trade shows are a great place to discover renovation tips and great decorating ideas. Here’s what you can look forward to this fall:
• Toronto Fall Home Show, runs Oct. 1-4 at Exhibition Place. It will showcase more than 250 vendors in the renovation and decoration market. Among the highlights, Bryan Baeumler from HGTV’s hit show Disaster DIY will be on hand to give a workshop on how to avoid renovation disasters. Canada’s ToolGirl, Mag Ruffman, will also give a workshop on creating a renovation rescue kit. Visit www.fallhomeshow.com for more.
• International Home Show, runs Oct. 9-12 at the International Centre in Mississauga. Celebrity chef Ken Kostick will be on hand to talk cooking tips and style expert Lynn Spence from CityLine will be a primary speaker at the show. Visit www.home-show.net for more.
About the HRTC
• The Home Renovation Tax Credit of up to $1,350 applies to alterations “of an enduring nature and integral to the dwelling,” meaning anything that is nailed down or wouldn’t get transported away.
• The HRTC eligible expenditures are more than $1,000.
• For more, log on to cra-arc.gc.ca/gncy/bdgt/2009/fqhmrnvtn-eng.html.
