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5 ways to finance your renovations

5 ways to finance renovations in Quebec in 2022

The more time we all spend at home, the more we’re drawn to the idea of doing major home renovations. In the current circumstances, adding a room for a home office, revamping the interior design or redoing the backyard (to spend holidays there) is not just a luxury but a must! Renovating can also help take advantage of the favourable conditions in the real estate market since strategic improvements can considerably increase your property’s resale value.

And, of course, sometimes there’s no other option when wear and tear, or just bad luck, come into play. Real estate is an important asset that’s relatively low risk but that requires a baseline of maintenance and management.

Drawing from your savings and emergency fund to finance renovations 

It’s generally recommended to have an emergency fund that could cover at least three months of current expenditures. While it’s preferable for this sum to be gaining interest, it should do that in a way that keeps it liquid, so it’s quickly and easily accessible.

I to meet small unforeseen expenses. But for larger work that you can plan in advance, it’s sometimes better to just let  

And in the event of unexpected extra costs during major renovations that are financed with a loan, your emergency fund will still be available to cover them.

Financing renovations with a credit card, credit line or personal loan

For medium- or large-scale projects, your credit card or credit line each offers advantages as well as non-negligible disadvantages.

Regardless of the situation, if you benefit from generous rewards, you should make all your purchases with your credit card to maximize your points or cashback. If you know significant expenses are coming up, it may be worthwhile to shop for a specific credit card that will optimize your benefits. However, the main risk with credit cards is not managing the repayment well. A balance of $10,000 that stays on your account for only three months, at a 20% interest, will cost you nearly $500.

Credit lines generally offer a better interest rate. Having access to a credit line can be very useful for longer-term work that requires sporadic cash outlays. However, it also requires a good dose of budgetary discipline. Since credit lines only require that the interest fees be paid on a monthly basis, too many borrowers end up paying a lot of money by making only the minimum payments every month.

A personal loan will generally cost more in interest than a credit line, but less than a credit card and the required monthly repayment of capital requires strict budgeting. 

Using a home equity loan or line of credit from your financial institution for renovations

A home equity loan or a home equity line of credit (HELOC) is similar to the credit options described above, but since the property is used as collateral, you will get a better lending rate than the above options. However, using home equity costs money at the outset, such as notary fees if your current mortgage doesn’t allow for an additional line of credit (umbrella mortgage). You therefore should assess whether the cost of the work is high enough that the interest savings compensate for the initial fees. Also, approval for a HELOC requires the same paperwork like the original financing (proof of income, credit verification, etc.). You must also meet the bank’s allowed loan-to-value ratio.

Refinancing a mortgage to finance renovations

Like a home equity loan or HELOC, mortgage refinancing is an option for people who want to do major work or improve their homes. The low interest and the spread of repayments over a longer period will allow you to keep saving and maintain your lifestyle during work.

In addition to fees, refinancing also requires you to fill out administrative paperwork and go through a credit investigation. This option may also be harder for some borrowers to access as mortgage regulations have become tighter in recent years.

Private mortgage to finance renovations

A private mortgage lender offers a solution that may be advantageous for financing medium- or large-scale renovations. The acceptance process is faster and simpler than the one used by major banks and credit unions. 

A private mortgage is also more flexible because it can offer terms that are better adapted to the borrower’s situation and needs. Unlike conventional institutions, this type of lender doesn’t attach as much importance to criteria like the credit file when assessing a project.  This can be very useful for borrowers who recently went through a somewhat difficult financial situation. Even if you are now completely back on your feet financially, banks may still be reluctant to finance your renovations. 

A second mortgage with a private lender is by far the best option because it lets you borrow money to do the work without touching the mortgage you have with your financial institution. Once the work is done and your financial situation is resolved, you can try to get a conventional bank refinancing to repay the second mortgage. 

Private lenders often have more decision-making flexibility and so can offer an alternative that’s more advantageous for many borrowers.

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