Home renovations have always been a popular option for homeowners to improve or refresh their homes, but renovations have gotten even more popular in recent years.
This is partly due to the number of people who were forced to stay home during the pandemic and may have wanted to make their space more comfortable, renovate a home office, or just finally get around to those improvements they put off now that they have some extra time on their hands.
At the same time, with the housing market as expensive as it is, many people have decided to improve their existing homes rather than try and look for something new. This can make your space more enjoyable to live in, and can also help to improve your property value to some extent.
The problem is that while home renovations are popular, the cost of undergoing renovations is also very high. Even on the best of days, renovation can use a lot of expensive materials and cost even more in labour (or time if you choose to handle the work yourself). On top of this, prices for building materials have skyrocketed in the past two years and remain elevated, making renovations even more expensive than usual.
If you only want to make small improvements to your home, you may have the savings on hand to make it happen, but for larger projects, you may need to look elsewhere to find the funding to get it done.
Luckily, banks and lenders offer loan options that can help you with this. There is a range of lending options that homeowners can use to help fund their renovation projects, from HELOCs to personal loans and beyond. This can make your renovation project a reality much sooner than if you had to save the funds yourself.
However, like any debt, you need to seriously consider your financial capabilities as well as the pros and cons before you take a home renovation loan. In this article, we will explore the different options for financing your home renovations, and how to know which is right for you.
Why finance a renovation?
The primary benefit of financing a home renovation instead of using your own savings is getting your project done sooner. Home renovations are meant to make your home more enjoyable and the sooner you can enjoy your improved home the better. If you go the saving route, you could be waiting years to enjoy your new deck, bathroom, basement or whatever else you wish to renovate.
Then there's the issue of having good saving practices. With financing, you will be much more motivated to pay back your loan every month. With saving, it may be more tempting to dip into your renovation savings from time to time, which will delay your project even more.
Finally, financing provides some flexibility in terms of budget. It is easier and faster to increase the amount you borrow than it is to increase your savings, and this can come in handy when your renovation project ends up costing over budget. Having accessible funds to get the job done is much better than having to stop halfway until you have enough money to complete your work.
For homeowners who have already borrowed money for their home purchase, paying a monthly fee for your home renovation loan won't be much different than paying your monthly mortgage bill, If you go with the same lender you may even be able to pay it on the same bill. Depending on how much you borrow and how soon you want to pay it back, it won't even affect your monthly expenses too drastically either.
The downsides to a home renovation loan? Well, for one you will always end up paying more in interest than you would have up front (though if you choose to wait material prices may increase anyway). You will also be increasing your debt service costs which can put a strain on your finances and could prevent you from getting future lending.
This could also be a risky decision in an environment like we currently seeing where interest rates are increasing. That extra monthly spend to cover your loan may not seem like much, but how will it feel when your interest rate increases one and a half or two percent?
Overall, financing is a good option, but you should always carefully consider your needs and capabilities before borrowing money.
Should I finance a renovation?
Deciding on whether or not to finance will come down to the cost of the project and how soon you want it done, as well as the potential value it provides to you.
For a low-cost project, it may just be easier to fund it with your savings directly and avoid the hassle and interest payments of a loan.
For a more expensive project, you may want to have it done sooner but can't fund it upfront yourself. Financing may be a good option in this case.
Consider also that renovating your home can improve your home's value, which in turn can offset some of your financing costs. Though every project will affect your home’s value differently, things like finishing a basement, improving a kitchen, or adding a renal unit can add value while improving your lifestyle. This can also be worthwhile if you want to renovate in order to prepare your home for sale.
What loans are available?
The good news is there are a lot of different home renovation financing options available. The bad news is you will need to know which is right for you in order to get the best deal. To help make that easier, we will explain a few of the most common options briefly to help you better understand what might work for you.
You probably already have a credit card, which means you already have a line of credit you can use for your home renovations. In general, using a credit card for a home renovation is best when used alongside some of your own savings because it is not ideal for large or long-term debt. Do what you can with your savings, then use your credit card to supplement with any other small costs you may have.
Due to the relatively smaller credit limit when compared to other financing options, along with high interest rates, this option is best used for small values, or amounts you know you can pay back within a short period of time. Overspending on your credit card can also quickly damage your credit score, so always be aware of what you are borrowing with this method.
Personal loans can be received from many different lenders, both big and small. A personal loan will have better interest rates than your credit card but is still not the best available when compared to more secured loans. However, unsecured personal loans are good to consider if you only need a smaller amount and aren't able to draw from a significant amount of home equity.
Offers for personal loans will vary a lot between lenders, and while they may be easy to get, it is worth your while to shop around for the best offer if you choose this route.
Home Equity Loans
When it comes to home renovations, the option to borrow against your home equity is one of the most popular. In some way it makes sense: you are borrowing money against your home to improve the home itself, which in turn may increase your home equity.
Home equity loans allow you to take out a lump sum of cash against your home equity, which can be a good option if you need to cover a large purchase. These loans also have some of the lowest interest rates available, which will make this one of the most financially sound options.
However, since you are borrowing against your home equity, you will be limited by how much you can borrow based on how much equity you have. If you have only recently purchased your home for example you may not be able to get much out of a home equity loan.
Home Equity Line of Credit
A Home Equity Line of Credit (HEOC) is a lot like a home equity loan, but rather than borrowing money in a lump sum you instead gain access to an open line of credit that you can draw from at will.
This option has similar benefits to a home equity loan in that you can potentially borrow a lot of money at a low-interest rate, with the same caveat of needing a sizable amount of equity to begin with.
HELOCs are a very flexible option if you have an ongoing home improvement project because you can withdraw only the funds you need when you need them. This means that not only is your money always on hand, but you also only pay interest for the amount you actually use. HELOCs also often have flexible payment options, including interest-only payments, and the ability to pay back what you borrowed over a long period of time.
Refinancing your mortgage
Refinancing your mortgage can be a powerful way to access a large amount of money from your home equity, though it will also take some careful consideration and a bit more work to get approved.
With a refinance, you pay off your existing mortgage with a new one for the updated value of your home. Assuming you purchased your home a while ago, your home may have increased in value significantly. If so, you can borrow a large amount of your home's total value, and anything that doesn't go towards servicing your previous mortgage will come to you as usable funds.
One nice benefit of using a refinance is that it consolidates your home renovation and mortgage loans under a single payment and interest rate, which can help to make monthly payments easier. Additionally, you will be able to pay off your funds over the course of a full mortgage, up to 35 years in some cases, which can drastically reduce your monthly costs (though for increased interest over time.)
You will also be able to renegotiate most of the terms of your mortgage, including your interest rates. This means if interest rates are favourable you could potentially get money out for renovations while actually paying less monthly.
Refinancing may even provide more than you need for a renovation and could be used for other purchases or investments. For example, many people will refinance in order to buy a second investment property, and you may even have some extra funds left over from the purchase to renovate your new asset once you take possession.
One downside to refinancing your mortgage is that you can't do it whenever you want without incurring a fee. If you are at the end of your current mortgage term, you can get as much money as possible out of a refinance. But, if you choose to refinance mid-term, you will likely have to pay a hefty fee for breaking your mortgage contract early, which can end up eating into your payment.
Refinancing to access funds for a renovation will also require you to resign your entire mortgage. For people who like where their mortgage is and don't want to interfere, a refinance may not be a great option.
Other options to consider
Beyond the popular options mentioned above, there are some other alternative options for financing a home renovation that you could explore. These may be good options for those without significant home equity to draw upon, those with damaged credit scores, or those with high debt service ratios who are having trouble getting a loan.
The first option would be to borrow money from family or friends. If you have wealthy friends or family they may be willing to lend you some money to help top up your savings. You can come to an agreement with this person on how they want to be repaid, and you will have a lot of options to negotiate. However, don't take this option lightly: it is a very good friend who is willing to lend money, and disputes over finances can often drive a wedge between people. Be sure to only borrow money from friends and family that you know you can pay back.
You could also look into alternative lending options such as credit unions and private lenders if a loan from one of the major lenders falls through. These options will often provide you with more flexibility and are willing to work with borrowers who have damaged credit scores, however, you may end up paying higher interest rates and other fees. Consider talking to a financial advisor to explore your options in this regard.
If you are choosing not to get a loan or use credit cards you may want to look into the financing options offered by the many hardware store chains around the country. If you are doing the home renovation yourself, there is a good chance you will be a customer of one of these stores. Some stores offer financing for larger purchases, and may also offer their own store brand credit card. This card will rarely provide any benefit over a standard credit card in terms of interest and fees, but it might provide you with access to special offers, extended warranties and other perks. Again, credit cards aren't usually your best option, but having these extra benefits can offset the downsides ever so slightly.
Renovating your home can be a very rewarding undertaking that can result in a more comfortable living experience as well as potentially increased property values. Though renovations are expensive, they are made a lot more accessible by the numerous loan options available to homeowners. By using a financing option that is right for you, you can make your renovation projects a reality potentially sooner than you even realized.
Each loan option for home renovations is slightly different and will work better for different people, however, there is likely something for everybody. If you are still unsure what may be best for you, consider consulting a professional financial advisor who can help you determine what you can afford and what rates and payment structures work best for your lifestyle. Happy renovating!