How to Finance Your Renovations

How to Finance Your Renovations

Choosing to renovate your property is a smart decision, but when cash flow is tight, it can be seemingly impossible. Here’s the good news: there are probably more options available to you than you think. When it comes to financing your home renovation project, consider boosting your cash flow through any one of these means:

 

Bank Loan

A bank loan is the most common and straightforward method of financing a renovation. Fixed amounts are withdrawn from your bank account on agreed upon regular intervals, whether that been weekly, biweekly or monthly intervals. This will be most profitable to an investor if they can make weekly payments, as the weekly payments will help reduce the amount of accrued interest that you would otherwise be paying.

 

Cash

It’s great if you have it, but dipping into your savings accounts may not actually merit the renovation  For example, if you have a substantial amount of money saved up in a high-interest mutual fund or investment account, then withdrawing it to finance a renovation project may not be the most profitable investment. When using cash, consider the hit you’ll be taking in compound interest that you would have otherwise earned if you had left it sitting in the bank, as well as any possible penalties (such as from an RRSP for an early withdrawal) against the cost of receiving an equivalent loan. In many cases, the loan will be less costly.

how to finance renovations

Credit Cards

Financing with plastic is tricky business. As a benefit, you can pay off as much or as little as you’re able on a monthly basis without receiving a penalty. If you have a card with a high enough limit, you can also completely bypass the waiting period that most have to deal with waiting for a bank loan approval.

But this convenience does come with a price. Interest rates are almost always significantly higher, and a maxed out credit card can lead to a reduced credit rating and a dangerous out of control debt spiral. Though this type of financing can work for some, for the most part a line of credit or conventional loan is the way to go.

 

Line Of Credit

When it comes to line of credit, there are generally two types:

  • Unsecured Personal Line of Credit: Approved individuals are able to borrow up to a pre-agreed upon limit and can pay off a portion or all of the balance every month. The flexible repayment terms of these lending vehicles make them incredibly attractive
  • Secured Personal Line of Credit: The benefit to having this type of financing is that they typically have lower interest rates due to the equity of your current property being used as security or collateral. It generally acts as a second mortgage, which though while inexpensive when it comes to interest payments means that your home can be foreclosed upon if you default

 

Refinancing your Mortgage

The real benefit here is that refinancing your mortgage allows you to enjoy a lower interest rate than a secured personal line of credit and you can pay off the balance over an extended period of time. The downside is that you may need to add appraisal and legal fees into your renovation balance, so you will need to balance out that amount versus the interest that you would otherwise pay for a secured personal line of credit.

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