Is it time to renovate?

During the past few months, I’ve noticed an increase in the number of clients looking to finance home improvements.

A friend who is a general contractor has also noticed an increase in the number of calls he’s getting for renovations and upgrades.

If you have equity in your home and the numbers make sense, it is often possible to refinance your current mortgage to add money to cover the cost of updates and renovations.

The first thing I look at is how much equity you have in your home. For refinances the maximum amount you can borrow is 80% of the value of your home. If you already owe more than 80%, you won’t be able to add additional funds.

The next thing I look at is your current mortgage. I check to see if you will incur a penalty for re-writing your current financing, and if so how much.

This is important because some lenders offer no-frills mortgage products at a slightly lower interest rate (usually .05% lower), but those mortgages come with a larger penalty for making any changes to the mortgage partway through the term.

In an ideal situation, we work with your current lender to add funds to the current mortgage as opposed to seeking out a new lender. If we are able to do this, many lenders will offer a blended rate on the new mortgage so that you don’t pay a penalty for making changes.

Having said that, one of the things I do is consider what the potential penalty will be as compared to the interest savings of going into a new mortgage with current interest rates.

Lately I’ve worked with a few clients where it made sense to pay the penalty and take a whole new mortgage.

If you are considering adding money to your mortgage for renovations, my recommendation is that you spend some time thinking about the scope of work you plan to do.

Make a detailed list and do your homework to see what you are looking at in terms of time and cost.

Will you do the work yourself or hire someone to do it for you? If you are hiring someone, I suggest you build in a buffer above and beyond what you are quoted in case there are cost overruns.

Older homes can come with surprises once you start opening up walls or trying to move plumbing.

Once you’ve put together a plan and a budget, I start looking for the best fit mortgage-wise.

You need to qualify for the new mortgage so will be asked to provide documentation confirming your income and the value of your home. Most likely we will need to order an appraisal.

Once the lender has had a chance to review the appraisal and confirms there is enough equity in your home, you will sign a new mortgage agreement with your lawyer or notary.

Once this is finalized you will receive a draft or trust cheque and you are off to the races. Or the hardware store.

People have different opinions as to whether refinancing your home is a good idea or not. An advantage to going this route is that the costs of the renovation are built into your mortgage, so you are paying a lower interest rate and have lower monthly payments.

The down side is that you are amortizing the money over a longer period of time.

If you choose to finance renovations on credit cards or credit cards, theoretically you will have the money paid off quicker.

In practice, that doesn’t always happen. The best approach to financing home renovations is different for client.

As COVID continues to affect our day lives, it seems people are spending less money on entertainment and eating out and more time at home. I think the trend of spending more money on home renovations will continue.

I love working with clients on these projects as I often get to see the before and after pictures. I’m inspired to get going on projects around my own home.

If you are thinking about home renovations and needing financing to do them, a quick conversation will let you know if adding money to your mortgage is the right way to go.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.