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How to Finance Your Home Renovation

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Feb 18, 2022
6 min read

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Home renovations can put a dent in your savings. And you may wonder if it is possible to invest in a remodelling your home without dipping into your rainy-day fund. 

Financing your home renovation means you can pay off the cost of your renovations over time, rather than finding the money right away. One way to invest in your property is to obtain a home improvement loan through RBC or another trusted financial institution. 

Here’s what you need to know about financing your home renovation and the various loan options available. 

Before you begin

Think about whether you want to use your home equity to secure financing. An RBC mortgage can accommodate improvements to your home, consolidating investments in house repairs, remodelling, and renovations. 

Alternatively, you may wish to use a personal loan or line of credit to get the home renovation money you need without putting your property up as collateral. However, financing a remodel without equity on your home often means less flexibility in payment schedules and limited cash up-front. 

It’s crucial to carefully consider your mortgage payments, current financial situation, and your investments when deciding how to finance your home renovation. 

Here are five ways homeowners can finance their remodels: 

Take out a second mortgage 

Putting a second mortgage on your home, also known as a mortgage add-on or home equity loan, can supply cash for an extensive renovation. This is often the best loan for a home addition, or a similarly expensive project. It is important to understand that a second mortgage must be paid off in addition to your current mortgage—if you cannot meet your financial obligations, you may risk losing your home. 

Because a second mortgage places so much on the line, specific guidelines have been developed. The maximum amount available for your home renovation loan is based on your assets and your current financial obligations. According to the government of Canada, you can borrow up to 80 per cent of your home’s appraised value minus the balance of your current mortgage and any liens on your home. 

Below, we’ll go over the four steps for calculating the likely value of your home equity loan.

Determine the current value of your home

You can obtain a rough estimate of your home’s market value using an online home value estimator or hire a professional appraiser to get a more precise value. For our example, let’s say your home has a market value of $200,000. 

Calculate 80 per cent of your home’s market value 

Eighty per cent of the $200,000 home is $160,000. This is the maximum value of the home equity loan, assuming the first mortgage is fully paid.

Obtain the present balance of your mortgage or any liens

If you still owe money on your current mortgage, this balance figures into the value of your home equity loan. Let’s assume the homeowner still has $60,000 left on their mortgage. 

Do the math

You’ll need to Subtract the amount in step 3 from the amount in step 2. This gets us the total amount available to borrow on a second mortgage. In our example, it would look like $160,000 – $60,000 = $100,000. Remember that origination fees and other legal fees and closing costs may also apply. 

Home equity line of credit (HELOC)

In contrast to a second mortgage, a home equity line of credit has few or no closing costs and variable interest rates. HELOCS are often the best loan for a home remodel with a moderate price tag and a longer completion time. The entire credit amount will be made available to you up-front, and you will only pay interest on the amount you withdraw, giving you greater flexibility in your payment schedule. You can re-borrow and pay down as often as you like within approved credit limits. 

A few caveats: taking out a line of credit on your home means that the creditor can put a lien on your property. If you cannot make your minimum monthly payments, you risk losing your house. 

You may require legal services (and their associated fees) to register a HELOC. In addition, your payment rates are adjustable and may increase over time. 

Cash-out mortgage refinance 

A cash-out refinance replaces your current mortgage with a loan for more than you presently owe on your house. The difference between the new loan and the balance you owe on your mortgage is paid out to you in cash. Unlike a second mortgage or a HELOC, a refinance consolidates your equity—you will still make one payment per month on the balance of your mortgage. 

Note that a cash-out refinance differs from a traditional refinance in two key ways: the balance of your mortgage will be increased and the interest rate on your home improvement loan may not be lower than the interest rate on your current mortgage. Cash-out refinancing is ideal when, like a traditional mortgage refinance, the new interest rate is lower than the old one. It’s the best of both worlds: your monthly interest rate goes down, and you get cash on hand for a more extensive home renovation. 

Personal loan

Wondering how to finance a remodel without equity in your home? This financing option can act as a loan for a house repair too large to put on your credit card but too small to justify a large home improvement loan. It is much faster and more accessible than a HELOC or a home equity loan. However, this type of loan is unsecured. Because you do not need a guarantee or a proof of insurance (like your mortgage), the interest rates are higher, and your payback period will be less flexible. 

Personal line of credit   

Taking out a personal line of credit can get you renovation funds quickly and without using your home’s equity in any way. However, your credit limit will most likely be lower than a HELOC because there is no collateral put up as a guarantee. Interest rates on your payments will also be higher. 

A personal line of credit can be a good option for financing a mid-cost project that will take several years to complete—you can borrow as needed and pay on a flexible schedule. Roof financing is a good example, as roofs may require regular maintenance and repairs over several years. The line of credit can be re-used for future projects. Start the credit line for occasional roof repairs, and you may be able to put it to good use in a doors and windows project or a kitchen remodel in a few years. 

What is the best renovation loan for your home improvement project?

Selecting the best home improvement loan or line to credit to finance your home renovation is not a decision to take lightly. The cost of your project, your completion timeline, and your home equity should all be considered when choosing the right financing option for your unique circumstances. 

You may be eligible for a publicly funded home improvement loan, subsidy, or tax credit. Explore financing options offered through your municipal office or through federal programs like the Canada Mortgage and Housing Corporation

Financing a home renovation means making an investment in your future. Ensure that you hire the right professionals for the job.  

This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.

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