Should you refinance for a renovation?

It’s been called the HGTV effect: after binge watching smartly-produced home design and renovation shows, homeowners have a burning desire to buy a dilapidated fixer-upper, strap on their tool belts, and head to Rona for some tiles and a wet saw. With any luck, these diligent home owners will put a fair amount of “sweat equity” into their homes over the course of a long weekend. While those who embark on this journey will soon discover that reality is a far cry from this fiction, they will also have to deal with a pesky little detail that HGTV largely glosses over: how to finance these renovations?

Of homeowners who are planning on renovating their homes in 2016, 52% expect to go over budget, according to a CIBC poll. It’s important, therefore, to know where the money is coming from so you can build a contingency fund for any extra costs. (And as any HGTV host will tell you, there are always extra costs.)
The CIBC poll shows that renovation is shifting to the outdoors and Dan Hanson, senior director of secured lending products at CIBC, says that most consumers doing these small-scale renovations will do it from savings, with others choosing to put it on their credit cards. Credit cards can be beneficial if the credit card has a rewards or points program, and many home owners then convert the balance after the renovation is complete, refinancing their mortgage and combining the balances.
Another option is to refinance your mortgage from the beginning, spreading the repayment over a long period of time and taking advantage of current mortgage rates, which are much lower than other options. You can borrow up to 80% of your home’s appraised value, minus the amount you have left to pay on your mortgage. If you think your renovation is going to take longer than expected, you can also open a personal line of credit, where you can access your funds at any time at rates lower than that of a credit card. Secured lines of credit such as home equity loans and home equity lines of credit (HELOC) are an option as well.
“What we found surprising actually is that very few people, 11%, choose to use a HELOC, which is basically the perfect solution for this kind of work,” Hanson says, adding that people tend to forget that it’s even an option. “It’s the best rate, you’re going to only pay interest on what you borrow when you borrow, and once you’re done, you can then convert it back into an amortizing mortgage.”
The CIBC poll also revealed that 62% of people planning a renovation don’t have a set renovation budget, and Hanson finds that troubling.
“From a financial advice perspective, we’re very big on the advice of having a plan,” he says. “This is a major expense and a major asset for most Canadians, so to not have a plan for how you’re going to take care of your asset, to maintain it and improve it, that’s concerning to me from an advice perspective.”
When asked whether or not prices in housing markets have anything to do with consumers’ desire to renovate, Hanson says, “absolutely.” With inventory in Toronto and Vancouver so low, people are worried that even if they sell their home and cash in, they won’t be able to find – or afford – another home.
Before you begin your renovation, talk to your mortgage professional about your options and how to best take advantage of today’s mortgage interest rates.

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