experts: real estate column Friday, November 15, 2013

Financing your home improvements

A great way to borrow money at historically low rates to improve your most important asset - your house!

By Kyle Green

Surprisingly only a small percentage of Canadians use home equity to do their renovations, but if set up properly can be a great way to borrow money at historically low rates to improve your most important asset - your house!

There are a variety of methods to finance your home renovations using purchase plus improvements, so that you don’t have to come up with all of your renovations out of your own pocket. Every lender is different, but here are some of the general methods:

1. Refinancing. Clients will often add a Line of Credit to their residence if they have enough equity to access it for their improvements. You can refinance up to 80% of the value of your home without paying any CMHC insurance premiums. 80% is the most common as it is the most cost effective and because HELOC’s and refinances with “A” lenders (Home Equity Line of Credits) are not available above 80% anymore. As of writing this, with rates at 3.09% or lower for 5 yr fixed, payments per $10,000 borrowed are only about $42/month.

2. Refinance plus Improvements. This is for clients who are already 80% financed (or close to it) and need to factor in the future value of the property to arrange financing for the improvements. Typically lenders will only allow for a max of 10% of the current price to be borrowed for improvements. To understand how it works, an example is often best.

“Say your property is worth $500,000 and you currently owe $380,000. The lender will use an “as improved” value of up to $550,000, allowing you to do $50,000 in renovations. Your new mortgage would be $430,000, but the lender will hold back the $50,000 until you have completed all of the work. Typically a 3rd party quote is required, and once the work has been done and an appraiser can confirm this, the funds being “held back” at your lawyer’s office will be released to you.”

3. Purchase plus Improvements. The same concept as a refinance plus improvements except on a house that you are purchasing.

4. Construction/Draw Financing. These can be more complex, as most lenders will use what is called a “Cost to Complete” basis to determine the amount of money being lent to you. In the event that you cannot afford to do all of the renovations before receiving the holdback funds, a draw schedule may be presented. This is typically how construction loans are set up (click here and go to my July 27th 2011 post for an in-depth overview of how construction financing works). A draw schedule will lay out the work that needs to be done to receive the next financing “draw”. Typically the bank will have restrictions on how many draws they will offer and when they will release the funds, so make sure you are VERY clear on this when sitting down with your broker or lender.

Kyle Green is an Ace Broker with Mortgage Alliance Meridian Mortgage Services Inc. Toll Free: 1-888-531-8890

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Recent Articles by this columnist:

Using your home equity to invest in real estate by using a HELOC
Wednesday, May 01, 2013

Bonds plummet to lowest levels in Canadian history
Friday, August 26, 2011

All articles by Kyle Green

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