Financing Options for Your Suite !
Before diving into home improvements, it's crucial to assess whether you can comfortably manage the resulting debt. Given that a mortgage is already a significant financial commitment, additional renovation costs could strain your budget beyond its limits.
To make an informed decision, crunch the numbers and engage in discussions with your family, friends, potential contractors, and mortgage broker. If your current budget falls short, consider alternatives such as continuing to save, pursuing a different property, or re-evaluating the scope of your projects plans.
Options for All
Government Incentives
The Secondary Suite Incentive program in Calgary will provide qualifying homeowners with up to $10,000 to build and register a secondary suite (Further breakdown coming in future blog post)
Options for New Home Buyers
Personal Savings
Using your own funds to build your project ensures financial independence from third-party lenders.
Credit Cards
While credit cards are available, their high-interest rates should be carefully considered. Projects like building a basement or backyard suite often involve significant costs, making credit cards less ideal for financing. Additionally, many businesses impose an extra service fee (typically 1-3%) for credit card payments.
Personal Line of Credit
A line of credit provides flexibility for ongoing or extended projects, with interest payments required only on the amount utilized. Compared to credit cards, lines of credit typically offer lower interest rates, and you can access funds up to your credit limit as needed, without the need for reapplying.
Private Financing
Several private lending firms will support your project endeavors through private financing. When considering private financing options for renovations, it's crucial to carefully review and compare interest rates, repayment terms, fees, and the overall financial stability of the lender or platform. Additionally, ensure you have a clear plan for how you will repay the loan to avoid financial strain or default.
Purchase Plus Improvement Mortgage
A Purchase Plus Improvement Mortgage is a type of mortgage that allows homebuyers to borrow additional funds beyond the purchase price of a property in order to finance renovations or improvements. Here's how it typically works:
1. Initial Purchase: You find a property that you wish to purchase, but it requires renovations or improvements to meet your needs or preferences.
2. Mortgage Approval: You apply for a mortgage based on the purchase price of the property as it stands (before improvements).
3. Estimation of Renovation Costs: You provide estimates or quotes for the cost of the renovations or improvements that you plan to undertake after purchasing the property.
4. Additional Financing: The lender considers the estimated cost of improvements and may offer you additional financing (up to a certain percentage of the home's post-renovation value) as part of your mortgage. This additional amount is intended to cover the cost of renovations.
5. Disbursement: Typically, the additional funds for renovations are not given to you upfront. Instead, they are held by the lender and disbursed to you or directly to contractors as the renovations are completed and inspected.
6. Completion and Inspection: Once renovations are finished, the lender may send an appraiser to verify that the work has been completed as agreed. They then release the funds for the improvements.
This type of mortgage can be advantageous because it allows you to finance the cost of improvements at a potentially lower interest rate compared to taking out a separate loan for renovations. It also avoids the need for a large out-of-pocket expense for renovations immediately after purchasing the property. However, you must ensure that the contractors you are pursuing will not require any percentage of their quotation upfront, as these will be costs you must carry until the lender releases the monies.
Own a Home? Options below
Mortgage Refinancing
Mortgage refinancing can benefit someone who wants to proceed with renovations on their home in several ways:
Access to Equity: If the value of your home has increased since you purchased it or since your last appraisal, refinancing allows you to access that equity. You can refinance your mortgage for a higher amount than your current mortgage balance, and use the extra cash to fund renovations.
Lower Interest Rates: If interest rates have dropped since you originally obtained your mortgage, refinancing can allow you to secure a lower interest rate. This can reduce your monthly payments and overall interest costs, freeing up more funds to invest in renovations.
Cash-Out Refinance: This option allows you to refinance your mortgage for more than you owe and take the difference in cash. This cash can then be used to fund home improvements or renovations.
Rental Income Towards Mortgage Approval
Rental income boosts mortgage approval by increasing total income, improving debt-to-income ratios, and demonstrating property value appreciation. Lenders assess rental income's stability, property condition, and market demand to gauge risk and creditworthiness, aiding in mortgage qualification. Typically this allows for a higher mortgage approval assisting with financing your projects renovations.
Home Equity Loan or Line of Credit
A Home Equity Line of Credit (HELOC) works as a revolving line of credit that allows homeowners to borrow money against the equity in their home. This is a flexible, low-cost, easy-to-access form of credit based on the value of your home, and how much mortgage you have already paid.
Private Financing
Several private lending firms will support your project endeavors through private financing. When considering private financing options for renovations, it's crucial to carefully review and compare interest rates, repayment terms, fees, and the overall financial stability of the lender or platform. Additionally, ensure you have a clear plan for how you will repay the loan to avoid financial strain or default.
