If you’re looking for a way to remodel your home, such as kitchen overhaul or bathroom repairs, but are short on funds? Taking out a home improvement loans might be the right choice for you. Home improvement projects can be daunting and costly affairs. Several home renovation loans can be customized according to your requirements to cover the cost of upgrades. In this article, we will discuss everything you need to know about home renovation loan in Canada.
What Are Home Renovation Loans?
Home renovation loans are the financing option that allows homeowners to renovate their homes without having to dip into their savings or splurge on high-interest credit cards. There are a variety of home renovation loan sources available to choose from:
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- Home Equity Line of Credit (HELOC)
- Home Equity Loan
- Mortgage Refinance
- Personal Loan
- Credit Card
Each of these financing options comes with distinct requirements, like credit score, owner’s income, credit limit, and interest rates. Choose the best home renovation plan that suits your needs and financial situation.
Types of Home Improvement Loans
Before you take the plunge of designing your dream home, you probably want to know the several types of home renovation loans available in Canada. Below are some of the most common types of home renovation loans each with its own set of characteristics and benefits.
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Home Equity Loan
It is a type of home improvement loan that allows homeowners to borrow an abundant sum of money at a low-interest rate. A home equity loan is typically a secured loan primarily using the equity in the borrower’s home as collateral, which is the difference between the current market value of the house and the amount of the overdue mortgage. These are beneficial for large-scale renovation projects and have lower interest rates than other types of personal loans.
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Home Equity Line of Credit
A HELOC Home Equity Line of Credit is similar to a home equity loan that uses the value of your home as security. It functions as a credit card, where you can borrow as per your needs to fund your home renovation projects. The major advantage of this type of home renovation loan is that you only pay interest on the amount you borrow, adding flexibility and convenience for ongoing projects. To be eligible, you must possess either a minimum of at least 20% home equity or if you have a mortgage of 35% home equity for a standalone HELOC.
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Mortgage Refinance
Refinancing your mortgage process involves replacing your current mortgage with a new one at a lower rate. It reduces your monthly payments and decreases the amount of interest you pay over your lifetime. Similarly, if you have access to equity in your home, this can help you to finance home improvement projects or other expenses. However, it is important to learn the potential risks associated with refinancing your mortgage, such as paying more in interest over the life of the loan and costly fees ranging from 2% to 6% of the loan amount.
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Personal Loans
Personal loans are unsecured loans best suited for those who need to cover home renovation expenses quickly but don’t have enough equity to qualify for a secured loan. They have a faster and easier application process than refinancing a mortgage or taking out a HELOC. For this, you may need to provide a clear construction plan and budget for the renovation, including calculating the cost for all the materials required. Additionally, personal loans can be secured or unsecured with shorter payback periods (under 60 months) and come with a higher interest rate, depending on your credit score and income.
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Credit Cards
Borrowing from a credit card might not be the ideal choice as the interest rates are often very high for home improvement projects. However, for small house renovation ideas or incidentals that cost a few thousand dollars, it can be a suitable option. Moreover, if you have a cash-back credit card and are waiting for your next paycheck to pay for the deeds, you can take advantage of the credit card’s 21-day grace period, during which no interest is accumulated. If not, you will be left with a hefty interest bill, so to avoid the risks, try to stick with small payments.
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Store Financing Programs
Store financing programs, i.e. Store credit cards are offered by many home improvement stores in Canada, such as Home Depot or Lowe’s. If you’re planning for small-scale home improvement or DIY projects, such as installing new windows or bathroom renovation, getting a store card through the retailer can be an easy and quick process. Typically, these programs offer additional perks, including promotional financing, extended warranties, and zero-interest or low-interest financing for a set period.
However, it is essential to read the terms and conditions of the program carefully before making a decision, as you may be subject to retroactive interest charges if you fail to pay off the balance within the time period, and the interest rates may be higher than regular mortgage financing.
Requirements For a Home Renovation Loan?
To maximize your chances of approval for a larger loan and getting favourable terms for your home improvement project, it’s crucial to prepare your finances with some of the following steps:
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- Employment –This is to ensure you’ll have a stable job with a steady income and thus the means to pay the home loan.
- Increase Income – Prior to applying, it may be beneficial to get a side gig to enhance your household income level. The chances of approval are upgraded with higher income.
- Down Payment– Try to provide a down payment of at least 10-20% of the total loan amount as it can help for future repayments.
- Debt-to-Income Ratio – Lenders will generally check your previous documents and necessary permits to see your debt-to-income ratio. try to sort out your smaller debts, to help increase your chances of approval.
- Collateral –If you’re seeking a personal home loan, you can provide an existing asset (vehicle, property, other valuable items etc) as assurance for the loan. Alternatively, you can ask a financially stable individual to cosign your loan application in order of better chances of securing the loan.
Should I Get a Home Renovation Loan?
Renovating your home can be beneficial as it improves the quality of life, addresses necessary repairs and upgrades and even drives the aesthetic value of your home. With smart and intelligent house renovation ideas, you can create an energy-efficient home, thus inducing comfort and safety without breaking the bank. Before applying, consider the scope of the project, the budget, and the length of time you’ll need to repay the home loan. For minor changes, choose temporary financings, such as store credit programs or regular credit cards with a grace period time.
Moreover, for large home improvement projects, take the benefit of a home equity loan or line of credit, which may provide more favourable terms and lower interest rates. If you are not financially competent to comfortably afford the loan payments, it is best to wait and save the cost for your future renovations.
In a Nutshell
Home renovation loans in Canada are a great way to finance a dream home renovation project. Whether you are looking to revamp your kitchen, repair the roof, or upgrade the bathroom, there are several types of loan options that can suit your financial situation and repayment terms. Before opting for home improvement loans, research on different lenders and compare the available options to get the best possible deal and ensure to review the terms to transform your dream project into a reality.
You May Also Read :
| Find Canada Mortgage Rates | Canada Mortgage Rates |
| Guide To Private Mortgage Lenders | Private Mortgage Lenders |
| Understand Different Types of Loans in Canada | Different Types of loans in Canada |
| Process of Personal Loan in Canada | Personal Loan in Canada |
Frequently Asked Question (FAQs)
A home renovation loan is used for financing the cost of renovating or upgrading your abode. This type of loan can often be secured or unsecured and comes from various sources, such as banks, credit unions, and private lenders.
Home renovation can be a costly endeavor, but there are various financing options available in Canada that can help you transform your dream into a reality. Personal loans Home equity loans HELOCs Mortgage refinancing
A home renovation loan could be the perfect option to refurbish your home if you meet the necessary requirements. A good credit score A stable income Adequate equity in your home to assure the loan. Proof of income and assets
With a home improvement loan, you can typically borrow up to 80% of the estimated value of your house with a home equity loan or HELOC and up to 95% of the gauged value of your abode with mortgage refinancing that allows you to make overhauls to your property and add substantial value to your investment. What is a home renovation loan?
What types of home renovation loans are available in Canada?
What are the eligibility requirements for a home renovation loan?
How much can you borrow with a home renovation loan?
