August 23, 2011
Coming Up With the Cash
There is more than one way to pay for that new bathroom or kitchen upgrade – consider some of these financing options.
BY KEVIN LUTZ
A home renovation project can represent a large investment of your time and budget and will affect the future value of your home. Whether your renovation project is simple or elaborate, bringing your ideas to life requires thorough planning and a step-by-step approach. Here are the financing options available to you and some of the important issues you should consider before getting started.
Paying cash is the best way to pay for your renovations and allows you full use of your future income. You are free from monthly payments and interest charges. But if paying cash means you’d have to dispose of assets, first consider the revenue you’ll lose – if it exceeds the interest you’d be paying on a loan, it makes more sense to finance your renovation. More importantly, be sure not to use up all your cash reserves to finance your project – you may need some cash to cover unexpected expenses or handle contingencies. In other words, carefully consider all your options before deciding to pay cash.
British Columbians who used financing in addition to cash or savings most commonly used credit cards (38 per cent) or a regular line of credit (24 per cent). The top reasons cited for using a credit card were to earn reward points (42 per cent), make it easier to track renovation expenses (30 per cent) and because they needed the available credit (28 per cent). Younger Canadians aged 18 to 34 planning to renovate in the next two years are most likely to say they will use a credit card to finance their project (40 per cent). Using your credit card to purchase materials is a convenient way to pay for projects you do yourself. If you use your card and pay your account in full each month by the due date, you’ll have the benefit of a short-term, interest-free loan. And with the right card, you earn valuable rewards points on your renovation purchases.
LINE OF CREDIT
A line of credit offers you immediate access to some or all of a pre-determined amount of cash whenever you wish to use it. A line of credit is well suited to a project that proceeds in stages, where you do not need all of your financing up front. A line of credit may be either secured or unsecured. Interest rates on a secured line of credit are generally the lowest of any type of personal credit. To obtain a secured line of credit, you need to provide some type of guarantee or collateral — typically the equity in your home. If you use the equity in your home to secure your line of credit, an up-front property appraisal may be required and legal fees may be charged. An unsecured line of credit requires no collateral, but generally results in a higher interest rate than a secured line.
HOME RENOVATION LOAN
A personal loan allows you to borrow a specified sum of money and repay it over a specified period of time, say three years. Interest rates are generally higher than those charged on a secured or unsecured line of credit, but less than those charged on credit cards. The interest rate may be fixed (the rate remains constant for the full repayment period) or variable (the rate floats with the prime rate). You can generally repay all or part of the outstanding loan at any time without penalty.
INCREASING YOUR MORTGAGE
If you already have equity established in your home – if the current market value of your home is more than the amount you owe on it – you might be able to remortgage your home and borrow additional funds for your renovations. Costs for this type of financing can
A recent Royal Bank of Canada survey found that the vast majority of Canadians (92 per cent) view renovations as a means to increase the value of their home. More than half of British Columbia homeowners intend to renovate over the next two years with 55 per cent of the renovators using cash or savings to pay for their project, while 45 per cent will borrow.
vary depending on where your home is located, how your mortgage is registered and the scope of your renovation. Major renovations may be financed under a construction draw mortgage program. Your financial institution can provide you with full details.
CONSULT A MORTGAGE SPECIALIST
With all that you will have going on with your renovation, squeezing in time to seek financing advice can be a challenge for almost anyone with a hectic schedule. Just as you may have hired experts to complete your renovations, you should consult a mortgage specialist for financing advice and peace of mind.