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How to Finance Your Renovation, Part IV
Today we continue our five-part series to help guide you through the process of financing your home renovation.
Previous parts are here:
Here are the final five financing options available to you when planning your renovation:
Finance the Renovation at the Purchase Stage
What if you're buying a new home that you know will need renovation work? In such an instance, it's a great idea to factor the renovation cost into the mortgage you take out to buy the house.
Simply subtract whatever down payment you're making for the home and add the renovation cost to calculate how big a mortgage you'll require.
By financing the renovation this way, you'll benefit by: amortizing the loan over a longer period, thereby resulting in lower payments than other financing would offer; probably landing lower interest rates; being able to launch the renovation right after you take possession of the home; and not having to dip into your savings or emergency money to get this done.
Do note that you'll need to get a good idea of the cost for the renovation before you can take out the mortgage, and you'll probably have to build in a buffer for overruns to ensure the mortgage loan is enough.
Credit Card
This is probably the least desirable option, simply because credit cards probably have the highest interest rates of all forms of financing. If you need to carry this debt over an extended period of time, those interest fees are really going to add up, and late fees can be painful. If you do opt to go this route, we suggest looking into a zero-interest credit card which can offer up to 18 months of interest-free spending. If you can pay off your renovation completely within that time frame, you'll save a lot of money in interest costs.
The advantage of going this route is that you won't be cutting into your home equity to pay for the upgrades. This is an extremely convenient option as it's easy to get a card, and it will likely increase your credit score, to boot! Another possible advantage is you may qualify for discounts or rewards, depending on your card. And some cards make you eligible for an additional warranty on what you buy.
Credit cards probably make the most sense when you're tackling smaller projects.
If you do use a credit card to finance your renovation, you better be in the habit of always paying it off in full; interest rates are generally 19 percentage points above the prime rate.
Personal Loan
Generally unsecured, this type of loan is very similar to a line of credit, but it's definitely the type of financing you want to pay off quickly. With interest ranging anywhere from six to 16 percentage points above the lender's prime rate, costs can add up very quickly if this loan stretches out over time.
Private Loan
Another option is to borrow the money from family or friends. This can be ideal because mom and dad aren't likely to charge you any interest, which will save plenty of money over time (do note that the CRA may have something to say about this; see below). Another advantage is you have the flexibility to pay off the loan over a longer time.
The downside? This could ultimately make it harder for your parents to retire when they originally planned. It could also potentially create conflict within your family.
It's important to be aware of the fact that the Canada Revenue Agency expects interest to be charged on this loan based on its formulas.
Personal Line of Credit
This is a wise option for more basic projects, and it doesn't involve borrowing against your home.
The upside of a personal line of credit is it's a flexible loan that allows you to get cash fast and if you desire, you can only pay down the interest each month. Also, you can use the money for whatever you want without having to show your lender proof that specific work was done.
Another benefit of this type of loan is that you can simply keep using the funds that you've already paid back without the hassle of applying for a new loan. Best of all, the interest rates for lines of credit tend to be lower than most other options presented here.
However, if you do choose this route, you better be vigilant with your payback schedule.
The downside here? Because this type of loan is unsecured, the interest rates are higher.
In Part V of our series, coming soon, we'll offer up a host of tips to help you navigate the process of choosing the right home renovation financing option for your particular needs.