More people are choosing to renovate their homes instead of moving. Some of the reasons may include affordability, enjoying their neighbourhood and proximity to family.
If you have owned your home for a few years you are likely in a position to use the equity in your home to do some upgrades. At what point does it become economically beneficial to use the equity in my home instead of savings or an unsecured line-of-credit (LOC)? My general “rule-of-thumb” is that if you’re planning renos for more than $20K, the costs of redoing your mortgage (which can include a penalty; legal fees and an appraisal) often offset the use of your savings or LOC.
Here are some useful tips and guidelines.
Talk to us first so you understand how much equity is available to you and what you can afford
It’s more exciting to plan the décor details of upgrading your kitchen or adding a room to you house than the details of how to pay for the reno. However, it’s important to determine what’s financially feasible first. Normally you can access up-to-80% of the equity in your home. Changes to income and credit history over the last year may affect your ability to borrow.
Don’t wait until you’ve finalized the quote with the renovator before you call us
You can always access a little more than necessary if you’re not sure the exact amount you’ll need. If you take out more equity than necessary, you can always put the equity back into your mortgage by using the mortgage’s pre-payment option. The last thing you’ll want to do is take out too little equity only to find that you have to put some of the renovations on a credit card or unsecured line-of-credit and now you have that additional debt payment.
You might actually get a better overall rate on your mortgage
We’ve contacted many of our clients whose mortgage rates are about 3% or higher as current rates on both fixed and variable-rate mortgages are under 2%. You might be surprised to find out that your overall payment on your mortgage is less than you’re paying now – even if you’re taking equity out to renovate your home because of the lower rates on mortgages.
Is it better to use a secured line-of-credit (SLOC) or wrap the renovations into the mortgage?
This really depends! If you think that you’ll be renovating sometime in the next couple of years, I would recommend using the secured line of credit as you won’t need to make payments on the loan until you access the equity in your home. However, if you’re planning to start in the next six to eight months, access the equity through refinancing your mortgage is better because the rate on a mortgage is lower than a SLOC and also the compounding period is semi-annually on mortgages versus a SLOC (so you pay overall less interest).
Remember we’re here to help! If you’re thinking about renovating this year, please be sure to contact us so we can help you make a good financial decision and keep moving ahead!