How to Finance Your Renovation, Part I

 This is the first of a comprehensive five-part blog series designed to give you everything you always wanted to know about how to finance a renovation... but were afraid to ask.

Thanks to the joys of the pandemic and virtually everyone being stuck at home all day (and a whole host of other reasons), more and more Greater Toronto Area homeowners have been contemplating renovations to their living space. Whether it be sprucing up the backyard for outside visitors with a new deck or patio, creating a home office, or some other updates -- either cosmetic or major -- renovation projects are really picking up steam.

Realistically, almost everyone wants to improve their home at one point or another, but how many of you actually want to think about the costs involved in renovating? (We hear crickets...)

However, this is an incredibly important factor when deciding what you want to do, how much you can afford to accomplish, and how you'll actually pay for what you desire.

No, crunching numbers is not nearly as exciting as picking out your new countertops or flooring, but if you plan your renovation financing properly, it's going to massively increase the chances that your project is a success.

A happy side benefit of this exercise is that it may help you gain more control over your finances by forcing you to face exactly how you're managing your savings and expenses, because honestly, it's pretty surprising how many of us really don't have a clear picture of our financial health. A better handle on this will definitely help you make whatever changes you need to transform your home into a more comfortable abode.

With this in mind, we want to shed some light on the financing options available to you  and a bit about what sort of return on your investment you can expect. Let's get to it, shall we?

First off, we need to determine which projects we should prioritize. There may be many different renovations you're mulling in your dreams, but in the real world, we are likely dealing with a budget, so you've got to select which projects make the most sense. If necessary, enlist the help of a contractor, architect or engineer to help you identify the most important tasks.

Priority needs to be given to work that is desperately needed (i.e., damaged floors, substandard insulation, old walls, foundation work).

Beyond urgent work, consideration should be given to how likely any enhancement is to add value to your home. You're likely to get the best return on investment (ROI) for renovations to:

• Kitchen;

• Bathrooms;

• Interior and exterior painting (ensure you choose a colour that appeals to most); and

• Decor (new lighting fixtures, new plumbing fixtures, counters, flooring).

We also recommend you look at improvements that will enhance sealing, insulation and ultimately energy performance. Ask yourself: 

• Are there drafty rooms in your house that require more insulation?

• Does your roof leak?

• How effective are your doors and windows at keeping cold or hot air outside your home?

• Do you have proper venting to ensure humidity is being removed from bathrooms or the kitchen?

• Is your electrical system up to Electrical Safety Authority building requirements?

All of these things are under-the-hood enhancements, but have a massive impact on not only your comfort, but your home's overall condition. Next up, consider your must-haves (perhaps an increase of storage space) and projects that will provide the greatest return in terms of your home's value.

After all, this is an investment in your home's future, right?

Another important consideration in the budget process is to determine exactly how much you are willing to spend, as this will drive the design choice process. You'll have a much clearer idea of which materials and fixtures will fit into your budget.

Once you've established your budget, next it's time to check your available cash and savings. Ideally, you'll want to pay for your reno with cash on hand or savings.

If there's actually enough there to pay for this, fantastic! But in most cases, you'll be looking at other financing options, which not only means developing a manageable pay-back plan, but also has traditionally meant putting your fate in the hands of a loan officer at your bank.

Thankfully, times have changed and there are now tons of other options to help you finance this project. Of course, wading through so many lenders, loan options and terms can be a cumbersome exercise in itself. We recommend you start by: (a) determining how much money you'll need and how much you can reasonably expect to pull together; (b) trimming your financing options down to those that meet what you need and are financially viable; and (c) focusing only on financial sources that can offer you the specific kind of loan you're seeking.

Bear in mind that you may not get as much financing as you ask for. Considerations such as your income, your credit rating and the loan-to-value ratio will all play a role in determining how much money you'll be able to borrow.

While available cash is an important factor, perhaps an even bigger consideration is how much equity you have, because this will really dictate your refinancing options. (Equity, by the way, is calculated by taking your home's current value and subtracting how much is still owed on your mortgage.)

Realistically, the net worth for the majority of homeowners is mostly comprised of their home's equity. So tapping into that makes a ton of sense.

Stay tuned for Part II of our series, in which we'll be exploring a few of the more popular renovation financing options available to you.