Everything You Need to Know About Home Renovation Mortgages
posted in Mortgage News
Home renovations have become increasingly popular among Canadians, with reports having shown that more than 40% of homeowners have either made home improvements in the past couple of years, or plan to soon.
However, despite their popularity, the rising cost of tools, materials and labor have made home renovations costly for Canadians, and homeowners are often in need of financial help to complete their projects.
If you’re a Canadian homeowner seeking to renovate your home, your mortgage could help you, here’s how:
What is a renovation mortgage?
Referring to a loan secured against real estate for renovation purposes, the terms of a renovation mortgage loan depend upon the type of loan you get. Many factors come into play when considering a renovation mortgage, such as your home equity, its market value and your personal financial circumstances.
Once you’ve decided what renovations you want to make to your home, you’ll need to get an estimate from a construction company so that you can discuss the budget and your mortgage refinancing options with a mortgage broker.
For more extensive home renovations, you may be able to gain the following benefits from a renovation mortgage:
- • Lower interest rates
- • Lower monthly payments as the loan is amortized over a longer period
- • Access to a higher amount according to the equity of your home
- • More controllable than other, more flexible renovation options such as lines of credit or credit cards
Can renovation costs be added to a mortgage?
There are several ways that Canadians can add renovation costs to their mortgage, and in some instances, lenders refinance a home to access equity needed to complete minor renovations. If the balance of your existing mortgage is less than 80%, and your family income supports a larger mortgage amount, you might qualify to refinance your mortgage with additional funds.
If you plan to purchase a home that needs work, you might want to consider a purchase plus improvement mortgage, which enables you to complete the work using your own funds, and once it’s finished, funds are released to you by the lender and your mortgage amount increases.
Using your mortgage for renovations
With a renovation mortgage, part of the funds go towards the purchase price or current mortgage balance, while the remaining funds are typically deposited into your bank account. In some cases, they may be advanced to a construction or renovation company – it will depend upon your instructions and the policy of the lender.
It's important to remember that from the day the renovation funds are deposited to your bank account, interest will start accruing on your renovation mortgage, irrespective of whether you use them to cover the cost of renovation, or not. With this in mind, it pays to have your labor, supplies and equipment set up and ready to go right away.
Whether you’re renovating an existing home, or have bought a property for the purpose of fixing it up, you should carefully consider your financing options, and a mortgage broker is the ideal person to do this with.