Financing Your Renovation Project

Financing your renovation or house addition project is an important consideration, that should be addressed early on in the renovation planning process.  The project won’t go very far if you can’t pay for it.

We’d all like to have the cash available to pay for the renovation project, but often this is not the case, especially for larger renovations and house addition projects.  Or sometimes the money is tied up in investments that the homeowner doesn’t want to cash in.  Fortunately, there are ways to get financing.  The following are popular options that our homeowner clients are using to pay for major projects.

Home Equity Line of Credit

The most popular method of financing a large renovation project is a line-of-credit secured by a mortgage on your home.  It easy financing to arrange, because it is a one-time process at the bank.  You then have the funds available when you need them.  And you only pay interest on the amount you borrow.  The drawback of this method is that you can only obtain a percentage of the equity in your home, so unless you have substantial equity renovation, you may not be able to free up enough additional funds to complete a large house addition project.

Construction Mortgage

A lesser known method of obtaining financing is through a construction mortgage.  The great thing about a construction mortgage is that it is based on the future value of the house when the project is complete, so you can obtain a larger amount of financing.  The drawback is that the funds are advanced by the bank in stages as the project is completed – so the bank controls disbursement, not you, as you would with a line of credit.  It is also a more expensive method, because the bank will charge a fee for each advance, and each advance includes a bank inspection to make sure the work has been completed.

There are other drawbacks.  Construction mortgages are a small percentage of the banks’ business, so bank staff are often not familiar with the product.  Our past clients have reported having received incorrect and conflicting information, and the approval process has at times been long.   In an urban area such as Toronto, they are generally easy to obtain, but we recently spoke with a homeowner in a rural area that was having difficulty arranging a construction mortgage.  It is also important to work with a builder who is familiar with the banks’ procedures and is willing to adjust  payment schedules  to match the banks’ mortgage disbursement schedule.  And be willing to wait for a couple of weeks for the payment.

CMHC Loans

Canada Mortgage and Housing Corporation (CMHC) offers loans to home owners to assist with renovation and house addition projects.  These are aimed specifically at:
1) assisting low income households living in substandard to bring the home to a a minimum safety level;
2) assisting low income persons with disabilities to make the home more liveable;  and
3) the creation of a self contained living unit for low-income seniors.
We’ll discuss CMHC loans in more detail in an upcoming blog post.

The important message is: start early.  Speak with your bank or credit union.  Talk to your builder.  Make sure everyone is on the same page and understands how the financing will work.

Your Turn

Do you know of other ways to finance a renovation project?  Send us your comments and ideas.