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How to Finance Your Dream Project
Finance Your Dream Project
  • 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 article on renovation financing we look at the various ways to borrow.
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  • Some homeowners spend large sums on landscaping, adding a new garage, or renovating the interior. When it comes time to sell their home they expect that those investments in home improvement will be reflected in the sale price. However, too often homeowners spend far too much or they make improvements that indulge their personal tastes. It is only afterwards, when it comes time to sell that they discover whether those changes will actually add to the value of their home.
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  • Questions to Consider:
    1. * How often do I want to make payments? Weekly, twice monthly, monthly?
    2. * Do I want to make monthly interest only payments until my project is finished and then start a regular repayment program?
    3. * Do I want all the money at once, or in two or three draws as my project progresses?
    4. * Can I benefit from getting my loan pre-approved, so I can shop around for the best deal knowing my money is already arranged?
    5. * To achieve the comfort of a longer repayment period, or to raise a larger amount, am I prepared to place some kind of first or second mortgage collateral on my property?
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  • If you have the urge to renovate you are not alone. Canadians spend well over $3 billion on materials and labour for renovations every year. Of the homeowners who did renovations in 1996, the average expenditure was $3,338.
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  • One explanation for the home improvement boom is that Canadians are eligible for an income tax exemption on the profit, or capital gains, they make when they sell their home. (Revenue Canada's only stipulation is that the home must be the principal residence.) Since the profit you make on your home is tax-free, it pays to do some research to ensure you maximize your return. The proper renovations can make your home more liveable and more saleable.
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  • Know Your Options
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  • To make sure your financing plan is best suited to your own particular situation, it's important that you find out what your options are for the types of plans that are available.
    1. Pre-approval - your lender may offer loan pre-approval, so you know how much you can afford to spend before you start getting estimates.
    2. Interest rate guarantee - most lenders will guarantee the interest rate for a specific length of time (such as sixty days) before you take out the loan.
    3. Fixed interest rate - some loans will carry a fixed interest rate for the entire term (the length of time over which you are paying off the loan).
    4. Variable or floating interest rate - some loans will carry variable interest rates which fluctuate during the term of the loan. Depending on changes in the money market, this will allow you to take advantage of a drop in interest rates, but you should also be prepared for the possibility of an increase in interest rates.
    5. Blend interest rate - when you are increasing an existing mortgage, you may receive a blended rate which is a compromise between the rate on your existing mortgage and the cost of the extra funds you are borrowing at the current rate.
    6. Payment frequency - you can generally choose to make payments weekly, every two weeks, twice a month or monthly.
    7. Pre-payment - depending on the type of loan you choose, there are various options for making larger payments or repaying the entire loan before the term of the loan is up. Most loans can be paid off in full at any time, but a charge may be levied by your lender in some cases.
    8. Insurance - some institutions offer life and/or disability insurance to qualifying borrowers as optional items to include in the loan package.
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  • Think about the amount you wish to borrow, the payment plan that fits your budget, and the type of loan that meets your needs. Discuss your options with a lender in advance, and have your loan pre-approved. Careful planning of the financial end of your renovations will ensure your peace of mind when your project is complete.