There are many reasons to undertake home renovations. Some people do them to improve the resale value of their house while others need to expand their home for their growing family. Regardless of why you’re renovating your home, you always need to consider how you’re going to finance your project. Whether you’re doing it yourself or hiring a contractor, home renovations are a significant financial investment and it’s important that you plan accordingly.

 

According to the Canadian Mortgage and Housing Corporation there are several options when it comes to financing your home:

Type of Financing	Strengths	Weaknesses	Ideal For:
Save Up	No debt	Takes a long time	Small renovations
Credit Card	Simple Fast	High interest rates Debt	Less expensive renovations
Personal Line of Credit	Lower interest rates Continual access to funds without reapplying	Debt Takes a long time to pay off	Long-term/ongoing renovations
TD Renovation Financing	Flexible interest rates Flexible repayment Easy process	Debt	Major home renovations
Home Equity Loans	Best interest rates Large borrowing amount	Legal and appraisal fees	Expensive home renovations
Mortgage Financing	Great interest rates Large borrowing amount	Repayment over years	Expensive renovations in a new (to you) home

We currently live in a society that both encourages and strives for instant gratification. Sometimes it’s better to go against the grain and take the time to save up enough money to complete a home renovation without the help of a financial institution. This tactic is usually the best for smaller renovation projects that are more realistic to save for (e.g. a bedroom renovation vs. a full-fledged kitchen renovation).

If you have a credit card with a limit that matches your renovation price, then you can consider using it to front the money you don’t have on hand. This is a simple way of financing your renovation, however, credit cards typically have very high interest rates so this option is better suited for less expensive projects that you can pay off quickly.

This kind of financing is best for long-term and/or ongoing renovations because it lets you access your funds at any point in time with a monthly report that helps you keep track of all of your renovation expenses. Lines of credit also have lower interest rates than credit cards, which is why they are ideal for long-term, more expensive renovations that you won’t be able to pay off as fast. Another benefit is that once you pay off your line of credit you can continue to access any remaining funds (up to the original limit) without having to reapply.

These types of loans are very similar to a line of credit but they use your home as collateral. They usually offer the best interest rates and allow you to use up to 80% of your home’s value. This means that you can have a higher limit, which is better for extreme renovations. The main downside to this type of financing is that setting up a home equity loan requires legal and appraisal fees that can get pretty expensive.

There are a couple of ways that you can use a mortgage to finance your home renovation. If you’re buying a new home and are planning to renovate it, add the estimated renovation costs to your mortgage. Mortgages typically have the best interest rates, much better than lines of credit and home equity loans. You can also do this if your current home already has a mortgage, by refinancing your major renovation budget into your mortgage. This allows you to spread repayment over a long period of time. Using a mortgage to finance your renovation usually has the lowest interest rates but it also means that you are going to be paying off your renovation for a long time.