Mortgage and renovation loan

Dernière mise à jour le January 7th, 2021

You have been a homeowner for a few years and would like to make some renovations to your home, but like many others, you do not necessarily have the money to renovate. You have contemplated adding renovations to your mortgage loan, but is that possible?

Yes, it is possible but it will depend on your situation! Here are the different possible scenarios.

If you would like to buy a house but there are renovations to be done, click here to consult the correct article!

The renovation line of credit

If you have owned your home for several years or if you had put a large down payment when you purchased it, you may have enough equity available. In that case, opening a mortgage line of credit could be an interesting option. If the term of your loan is not expiring soon I would recommend you contact the bank with which you currently have your mortgage. It may be possible that they could quickly open a line of credit.

Warning: The home equity loan

It is also possible that your bank offers to open a home equity loan. The rate will probably be better than on a line of credit but we must be careful with the equity loan. Often the end of term date does not correspond with your existing one. So no matter when you decide to sell, renew or refinance your loan, there would be a penalty to pay since one of the two terms for your loan would not be complete. In other words, unintentionally, you would become « trapped » by your bank.

In case your current bank refuses to open a home equity loan, you can give me a call. As a mortgage broker, I have access to several banking institutions. In some cases, it may work with me even though your bank has refused your file.

Mortgage refinancing for renovations

Mortgage refinancing can also be an excellent way to pay for renovations. Refinancing is when you increase the current borrowed balance.
You must keep at least 20% equity on the house, meaning you can get up to 80% of the property’s market value. Here is an example to help you better understand:

Estimated cost of renovations: $20,000

Estimated market value of your home: $230,000
80% of the value of your home: $184,000 (80%X230,000$-$184,000)
Current mortgage balance: 164,000

Amount available for refinancing: $20,000 ($184,000-$164,000-$20,000)
In this scenario, you would have $20,000 to do your renovations. Life is good when you have the best of both worlds!

You should know that refinancing usually requires a visit with the notary. In some cases, the notary fees may be taken care of by the new lending bank.

It is also possible to change the amortization (total loan repayment period, usually 25 years) to prevent an increase in monthly payments. If we use the example above:

Situation before renovations

Mortgage balance: $164,000
Interest rate: 3.5%
Amortization remaining: 10 years
Monthly payment: $1,619.79

Situation after refinancing for $20,000 renovation

Mortgage balance: $184,000

Interest rate: 3.5%

New amortization: 12 years

Monthly payment: $1,564.46

In this scenario, you would even pay a little less per month than before, but it would take you 2 more years to pay off your house.

In the above scenario, you would have $20,000 for renovations. Life is good when you have the best of both worlds!

In case the cost of your renovations is more than $20,000 and the current value of your home does not allow you to finance renovations as you would like, don’t panic. There is a solution!

Mortgage refinancing with renovations

This option is very similar to the refinancing described above but there is a very important difference. We can estimate the future value of your property once the renovations are completed to determine the amount to lend. Therefore, if the bank’s offer does not cover the cost of renovations during refinancing another bank may accept to do so by taking into account the value of your home after renovations. Here is an example:

Estimated cost of renovations: $50,000
Current value of your home: $230,000

Current mortgage balance: $164,000
Maximum refinancing: 80% of $230,000 -$184,000

Equity available for refinancing: $184,000-$164,000-$20,000
You could get $20,000, but you expect your renovations to cost $50,000. You will then be short $30,000. That is where mortgage refinancing with renovations comes into play!

Let’s take the example above:

Estimated cost of renovations: $50,000
Current value of your home: $230,000
Estimated value after renovations: $270,000
Current mortgage balance: $164,000
Maximum refinancing 80% of $270,000 -$216,000
Equity available for refinancing: $216,000-$164,000-$52,000

Basically, because the bank has used the future value of your property to determine its value, it can provide you with more financing. However, the bank will ask to be kept informed of the progress of the work. The bank will be able to finance the same $20,000 today as in the example above. That is, the $20,000 that is currently available on the house. However, you will have a disbursement agreement once the work is finished or a progressive disbursement agreement if it is a very large amount.

In other words, you will now have $20,000 to start your renovations. You then complete a portion of the renovations and contact the bank. They will take into account the progress made and make the first disbursement. Once the renovations are done, the bank will be able to pay the rest of the money.

There are very few banks that offer this type of mortgage arrangement so if you think this is what you need, I highly recommend you contact a mortgage broker. The mortgage broker will know which institution to refer you to. I am a mortgage broker so please don’t hesitate to email me or call me if you have any questions!