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How to finance your renovations with your mortgage?

Published on November 28, 2022 by Naureen Durack

When you buy a property, it may happen that your new acquisition requires renovation. However, the expenses involved in this work can have a major impact on your budget. Several solutions are available to you to finance the purchase of your property including future renovations, including the renovation mortgage loan. Find out more about this type of financing from your mortgage broker.

Considerations before using your mortgage

The first step in your real estate purchase and renovation project is to determine your budget. You need to assess your cash flow and savings to see if you have enough capital for your entire project. By accurately identifying your goals, you can gradually accumulate the necessary funds.

This option allows you to avoid taking out a mortgage for the purchase and then taking out a new personal loan for the renovations a few years later. However, there are a few things to be aware of before financing your home improvements with your savings or cash flow:

  • Keep your reserves intact

Putting money aside allows you to have a personal reserve to finance new projects. This option also allows you to face hard times and cover unexpected expenses with your emergency fund. By keeping your reserves intact, you avoid unpleasant surprises caused by a drop in income or a job loss. Your savings can also be used to prepare for your retirement with peace of mind.

  • Not using your retirement fund (RRSP)

An RRSP, or Registered Retirement Savings Plan, allows the beneficiary to defer income taxes until the time of withdrawal. Contributions are tax-deductible, resulting in lower taxes during the savings period. However, the amounts withdrawn from your RRSP are taxed, which can put a strain on your budget. It is not advisable to use your savings plan contributions to finance your renovation.

  • The interest rate on your mortgage versus the rate of return on your savings

The return on your savings is also a consideration before making improvements to your home. It is a good idea to preserve your savings if the rate of return on your savings is higher than the interest rate on your mortgage.

What is a renovation mortgage? (conditions)

If you want to buy a property to renovate, you must consider the total cost of the work in addition to the purchase price. These expenses include the services of a company, tools and construction materials and can be very expensive. However, it is possible to include the cost of the renovations directly in your real estate purchase project.

The renovation-purchase mortgage is bank financing that is designed to support a borrower in the purchase of their property, but also to customize the renovations. A portion of the funds provided is applied to the purchase of the property or the current mortgage balance, while the remaining amount is paid to a renovation company.

However, the borrower must meet certain conditions to be eligible for a renovation mortgage. The lending institutions determine the type of credit adapted to your needs according to the amount of money at your disposal. Two solutions are available to you:

  • a minimum down payment of 5% is required for mortgages with renovations up to $500,000. For loans over $500,000, including the amount of the renovation, the minimum requirement is 10% of the loan amount. However, some lenders set the maximum down payment at 20% of the value of the renovated property or $40,000 for renovations.
  • under certain conditions, the borrower can receive $60,000 or more for renovations if the down payment is greater than 20%.

In all cases, it is advisable to use a mortgage broker to optimize your chances of obtaining a financing offer adapted to your needs. This professional will take care of your application for a mortgage loan with renovations and will accompany you in your search for offers. They can also negotiate the best interest rate and repayment terms for you.

Benefits of a renovation mortgage

Financing home renovations with your mortgage has many advantages, including an attractive interest rate. In fact, the interest costs of a renovation mortgage are generally lower than other financing solutions. You also benefit from lower monthly payments by amortizing your loan over a longer period. For a mortgage, the amortization can be up to 25 years. Depending on the equity in your home, you may be able to benefit from a larger amount for your renovations. You also avoid using your savings or emergency fund to complete your project.

In addition to the renovation mortgage, there are other ways to finance the work on your new home. Mortgage refinancing can be considered to finance major renovations. This solution consists of spreading the payments over a longer period of time. You also benefit from a lower interest rate than with a personal loan. The amount borrowed can be up to 80% of the market value of your property, provided that the work done adds value to the house.

Evaluate your work before applying for a loan

While there are advantages to using a mortgage to finance the purchase and renovation of your property, there are certain criteria that must be considered before you apply for a loan. First, it is important to make an estimate of the costs of your renovation project. To do this, you need to obtain estimates that accurately describe the work to be done on your home. This step will give you an idea of how much the renovation mortgage will cost. It is advisable to call upon a qualified contractor, member of the Régie du bâtiment du Québec (RBQ). This professional will estimate the scope of the work, allowing you to determine your budget. However, make sure that the actual cost of the renovations does not exceed the amount set at the time of the mortgage financing. Don't forget to submit receipts to your lending institution to support the cost of the work.

Choosing the right rooms to renovate

Your application for a renovation mortgage provides the bank with information about the work to be done on your future property. The bank will grant the amount requested in accordance with the renovations presented in your application. If you change your mind about the modifications or materials used, for example, the lending institution may refuse to finance the renovations. That's why it's important to identify the rooms to be renovated before you apply for financing. If you want to renovate the kitchen, living rooms or bathroom, you must announce it in your project and then stick to it when carrying out the work. Once the bank approves your financing, it is not possible to go back on this decision and allocate the funds to other work not initially planned.

Whatever the purchase of the property and the renovations to be planned, the mortgage is an interesting alternative to finance your project. To make your wish come true, don't hesitate to ask your mortgage broker for help.

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