- dan@yourrateguy.ca
- 895 Don Mills Rd, North York, ON, M3C 1W3
- Adamas Financial Corp. #13266
A home renovation can be an exciting project. You’ve been dreaming of the changes you’ll make to create a home that suits your family and your tastes. But, renovation projects can be costly and paying for your dreams to become reality may seem out of your reach.
This is why you should consider a renovation loan. Many people don’t even know these types of loans are available but it makes sense that a large financial project such as a renovation should have an appropriate loan. For example, you get a car loan to buy a car, a student loan to go to school and a mortgage to buy a home. So, logically, a renovation loan is the best choice for doing a renovation project.
Before getting started, do your research about the project you intend to complete. Decide on some key details that will help determine the true price tag of the project and add an additional 15 – 20% for unexpected costs. Consider how long the project will take and how it will impact other aspects of your everyday life. If it’s a kitchen renovation, will you need to eat out more often? If your laundry room is relocated will you need to pay to use a laundry service? These hidden details can add to the cost of the project so it’s a good idea to try and consider as many unforeseen scenarios as possible.
Once you know how much you will need, you can consider your options.
Often, people will try to finance their project using high interest credit cards or unsecured lines of credit. For large projects, these are not ideal options.
Some may consider a home equity line of credit (HELOC) which takes into account the equity you have built up in your home. For a long-term homeowner this may give them the funds they need to complete the project. But, for newer homeowners, they have not built up enough equity to be able to finance a reno.
HELOC typically allows you to borrow 80% of the current value of your home minus the amount you owe on your mortgage. If you’re doing a major renovation or addition, this may not be enough to cover the project.
For example, if your home is currently worth $500,000 and you still owe $300,000 you would be able to borrow $100,000. But, if the addition you’re planning will cost $200,000 you’ll be short half the amount required.
| Current value | $500,000 |
| 80% of current value | $400,000 |
| Amount owing | $300,000 |
| Credit available | $100,000 |
With a renovation loan, the calculation is based on the post-renovation value of your home. Using the same example as above, the addition will increase the value of the home to $700,000. This is the new number used to calculate how much credit is available to you.
| Projected value | $700,000 |
| 80% of current value | $560,000 |
| Amount owing | $300,000 |
| Credit available | $260,000 |
You’ll see that a renovation loan will allow for the entire addition with room to spare (pun intended).
To get the best rates for a home renovation loan, you should have a good credit score. Do you have multiple debts from a variety of lenders? Have you had trouble repaying debt in the past? When considering a large addition or renovation you need to take a realistic look at your finances and understand if you can truly afford to invest in a project like this at this particular time.
If you have other debt, consider paying it off first. Your debt-to-income ratio is an important factor when borrowing money, so, if you have smaller debts from credit card or student loans, pay them off. It will not only put you in a better position for being approved, but also for your own personal financial situation.
Working with a mortgage broker will help you get the best interest rate. They have access to a network of lenders they do business with and can shop around to get you the best rate possible.
Brokers fully understand the terms of conditions of different types of loans and can guide you through the process based on your unique needs and situation. In addition to getting you the best interest rate, they understand the nuances and implications of the many different products available to you and can help you determine what is best for your needs. A broker will assist in getting the proper paperwork in order and put you in the best position for being approved.
If you’re considering a major renovation or addition to your home, a renovation loan may be what you need to complete the project. If you have questions about your project or how you can qualify for this type of loan, book a consultation to discuss the details.
Dan Mizrahi – Your Rate Guy can help you secure your mortgage and provide you with numerous options to get you the money you need and deserve.
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