The first thing to consider when you decide to renovate is exactly how you want to enhance your home. It seems obvious, but making sure you have a clearly defined vision from the start will minimise the risk of getting carried away and allow you to stick to a budget.
Once you decide on what kind of renovation you need, its time to create a financial plan. Balancing your desires versus reality is essential. Building something beyond your financial reach can create unnecessary worry. You don’t want to, however, jeopardise the quality of your renovation by compromising on the quality of products or materials – it’s about finding the right balance.
When budgeting, it’s important to take into account
- Your combined household income and expenditure
- Your savings & assets
- Your current home loan
- Your other liabilities, such as credit cards & car repayments
- How much you need to borrow.
- How much equity you currently have in your home.
- Whether you need the money all at once or would prefer to draw on it as necessary.
- Whether you want to make payments in scheduled instalments or follow a more flexible schedule.
- Your comfort level with placing a second mortgage on your home
Here are some financing options:
Refinancing your mortgage is an option to consider if you’ve already built some equity in your home and you’re planning a major renovation. For example, if you want to borrow $30,000 to build an addition and you have $120,000 left to pay on a $200,000 mortgage, you may be able to take cash out by raising the principal on your mortgage to $150,000. This would allow you to pay for the entire renovation up front. Depending on the terms, your monthly mortgage payment might remain the same; only the length of the loan will be extended. If you’re adding something structural (as opposed to simply redecorating) lenders may approve you based on the projected value of your home after the project is complete.
A home equity loan works much like a conventional first mortgage. You borrow a lump sum that is secured against your home, and the payments are amortized over several years. Usually, the interest rate and monthly payment remain fixed throughout the term of the loan. This option requires an additional payment on top of your first mortgage and usually carries a higher interest rate than refinancing your mortgage. However, the closing costs may be lower and it can be right if you don’t want to refinance and you need the money for your renovation all at once.
A home equity line of credit (HELOC) is a good choice if you’ll be paying for your project in stages. With this option, the lender agrees to advance you money up to a specified limit, and you access the money as needed with a credit card or cheque book, making it easy to pay contractors. Monthly payments can be lower than those of a home equity loan, since you have the option of paying interest only on the money you withdraw. The other important difference is that HELOCs carry adjustable interest rates, while home equity loans typically have fixed rates.
A personal loan or line of credit may be all you need for a smaller project. The fees to set these up can be lower than those for refinancing your mortgage or tapping your home’s equity. The only drawback is that Personal loans are not. Always consult a tax advisor about your particular situation.