What is renovation mortgage financing?

It’s a fact: houses are expensive, whether it’s brand new or a century home. It’s also true that recently renovated homes sell for a premium price.

And Canadians are ready to renovate. A recent report found 44% of Canadians have either already completed home renovations in the past year, or they’re planning to renovate in the near future.

While many people look to buy fixer-uppers, the high price of renovation tools, supplies, and labour means they need to add the cost of renovations to the mortgage. And sometimes homeowners need a hand to help pay for renos to keep a home habitable or make it more comfortable.

Learn how to add renovation costs to a mortgage in Canada and get answers to some of the most common renovation mortgage financing questions.

What is a renovation mortgage?

The term “renovation mortgage” refers to a loan secured against real estate for the purpose of renovations. The amount, rate, length, and other terms of the loan depend on the type of renovation mortgage loan you get.

If you’re wondering ‘can I get a mortgage with extra money for renovations when buying a home?’ or ‘can I use a mortgage for renovations of our current home?’ the short answer is maybe.

Essentially - each situation is a little different. Your home equity, market value of the home, your own financial situation, all these factors come into play with mortgage renovation financing.

Your first step involves deciding what you need or want to do. Next, you’ll need to get an estimate on how much it costs. This can help you narrow down your renovation mortgage financing options and see how a renovation mortgage loan could work in your situation.

Benefits of a home reno mortgage

A mortgage isn’t the only way to finance home repairs or renovations. Other alternative financing options for home renovations include:

  • Using your savings to update your home without going into debt Using a credit card
  • An unsecured credit line
  • A secured credit line (home equity line of credit or HELOC)
  • A personal loan
  • A loan from a family member

Some of these home renovation finance options are appealing because they’re convenient and quick to set up and access. However, if you’re planning a more extensive renovation project, a home renovation mortgage loan can offer the following benefits:

  1. Lower interest rates
  2. Lower monthly payments as the loan gets amortized over a longer period
  3. Access to a higher amount depending on your home equity
  4. A good option for borrowers who might feel tempted to abuse the flexibility of other home renovation options mentioned above - such as credit lines or credit cards

Can I add renovation costs to my mortgage?

Possibly. In Canada, there are at least a couple of different ways to add renovation costs to mortgages.

Sometimes lenders refinance a home to access equity needed to complete minor renovations. So, if your current mortgage balance is below 80% of the current market value of your home, and your family income supports a larger mortgage amount, you may qualify to refinance your mortgage with additional funds.

If you’re buying a home that needs work, consider a purchase plus improvement mortgage. This allows you to complete the work required on the home with your own funds. Then once the renovations are complete, the lender releases funds to you and your mortgage amount increases.

For example, you may purchase a home with a mortgage of $600,000, and an improvement amount of $25,000. You use savings to complete the improvements/renovations, then your mortgage amount increases to $625,000 and you receive $25,000 cash to replenish your savings.

With Manulife Bank mortgages, you can get a purchase plus improvement loan of the lesser of these two options:

  • 10% of the purchase price of the home, or
  • The cost of renovations up to $40,000

Your mortgage will also need to be covered by an approved mortgage insurer.

How to use your mortgage for renovations

With renovation mortgages, part of the funds go towards the purchase price or current mortgage balance, and the remainder of the funds are usually deposited to your bank account – or possibly advanced to a construction/renovation company, depending on your instructions and lender policy.

One key thing to remember with mortgage renovation loans is that interest starts accruing from the day the renovation funds get deposited to your bank account, whether you use them to cover your renovation costs or not.

This means that it is important to have your labor, supplies, and equipment lined up to start work immediately.

It’s important to consider all your available options when it comes to home renovation financing for your new or existing fixer-upper home. Remember, your financial situation is unique to you. To make the right decision when it comes to your home renovation loan, talk to a mortgage specialist today.