Renovation Financing: The First Steps

If you have decided to borrow to finance your renovation project, you should take time to research the various ways that banks, trust companies and other financial institutions have of offering financing. In this first of a two-part series on renovation financing we look at the various ways to borrow.

Sit down with your lender, and find out how much you are qualified to borrow comfortably. Once you have a better idea of the amount you can afford, you are ready to shop around for estimates from at least three professional renovators. You should add a 10-20% contingency margin to the prices you are quoted. This should cover any unexpected costs that may arise during the course of your renovation project.

Choose Your Financing Plan
The type of financing plan you choose will generally depend on how much your project is going to cost and how much you want to pay on a regular basis. It's up to you to determine which plan is best suited to your needs.

• Personal Loans - the majority of borrowing needs can be met by personal loan plans paid by the installment method. If the amount borrowed can be paid off comfortably in regular payments over the next five years, then a personal loan is likely best for you. As a homeowner adding to the value of your property, it may be that no collateral will be necessary. Lenders offer fixed and variable interest rates, full or partial repayment at any time without penalty, and optional life and disability insurance to qualified borrowers.
  
  
• Personal Line of Credit - in this type of borrowing, the lender agrees to a credit limit, and you may borrow up to that amount at any time. You can draw funds at any time using special cheques, and can also issue these cheques directly to suppliers and contractors. You only pay interest on the money you are actually borrowing. If you're securing the line of credit with a mortgage on your property, you will generally get lower interest rates. The line of credit is ideal for financing ongoing or long-term home renovations.
  
  
• Home Equity Loans - For large-scale projects where payback is more comfortable over a longer period of time, mortgage security is usually required. If your property presently has no mortgage, you may arrange a home equity loan supported by a first mortgage. A later purchaser of the property can not assume a home equity loan. This type of loan is generally the choice for second mortgage borrowing as well. Some properties which do not qualify for regular mortgaging do qualify for home equity financing.
  
  
• Homeowner's Mortgage - if your property qualifies, and you don't already have a mortgage, you may want to arrange a new first mortgage to finance your renovations. If you have a first mortgage at a good rate, an alternative to the second mortgage is to increase your first mortgage. If you borrow from the same lender, the costs are less than obtaining a brand-new mortgage for the increased amount, and you will pay a blended rate.

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