With low interest rates, now is an ideal time to tap into the available equity in your home to fund your renovation needs. As a homeowner, you understand the importance of maintaining your home to ensure it ages well with the times. But you also know that it can be daunting to think about all of the on-going costs for renovations and maintenance required to keep your home updated and looking great.
Freeing up funds through refinancing
The good news is, if you have built up equity in your home, refinancing your mortgage is a cost-effective way to make funds available to renovate your home.
Another benefit of refinancing is to lock into a lower fixed or variable rate for your mortgage and renovation expenses.
If you choose to refinance, it’s important to note that there may be penalties for paying out your existing mortgage loan prior to renewal, but these penalties will be offset by a lower interest rate, and at the same time, you can access extra money to put toward your renovations.
By refinancing, thanks to lower interest rates, even though you are taking on more debt, you can pay your mortgage off faster. Most mortgage products, for instance, include prepayment privileges that enable you to pay up to 20 per cent of the principal (the true value of your mortgage minus the interest payments) in lump-sum payments per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money.
In addition, some lenders also allow consumers to pay anywhere from an extra 20 per cent of their monthly mortgage payment on top of doubling up their mortgage payments.
In the example in table #1, by refinancing, the clients were able to use the equity in their home to renovate their kitchen while at the same time improve their cash flow by $499.32 per month, which is a savings of $29,959.20 over the next five years. In addition, the kitchen renovation increased the value of their home.
A home equity line of credit (HELOC)
The maximum mortgage amount lenders will allow you to refinance is up to 80 percent of the value of your property. You can always have a portion of your mortgage in a fixed
or variable interest rate only and/or have another portion as a HELOC, a loan that gives you access to the equity of your home.
Therefore, as you pay down your mortgage, that amount becomes available in your HELOC. This allows you to have the funds available when you need them. If you want a HELOC only and have paid off your mortgage, the lenders will only allow up to 65 percent of the value of the property.
Some of the advantages of using a HELOC are:
• Lower interest rates than credit cards or other high-interest means of accessing funds.
• Access to equity as you need the funds for the renovations, and you pay interest only on the portion that you use.
• Pay the HELOC off at any time without a penalty (although there could be some fees associated with a HELOC).
• Substantial savings versus using a credit card or loan: HELOC at 2.95 percent interest, compared to 18 percent for a credit card or loan.
Whether you end up using your HELOC or credit cards to finance your renovations, you will only be making minimal payments and it can take a long time to pay it off. While the HELOC will have a lower interest rate compared to credit cards, you do have to have a plan on how you intend to pay for it.
Table #2 below shows an example of what would happen if a homeowner decided to use their existing HELOC to finance their kitchen renovation instead of using credit cards, based on cost of $49,600 for the renovation.
Choose a strategy
It is important to have a strategy in place prior to doing your renovation, therefore a mortgage expert can help you determine what is the best financing option for your renovation based on your unique needs. In addition to setting you up with a new lower mortgage payment, a mortgage expert can also find a lender that offers the most flexible prepayment privileges.
Interior design services and photos of the kitchen renovation provided by Susan Collins from SMC Interior Design