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How to Finance Home Improvements

Jackie Bowen Uncategorised February 16, 2021

More often these days, Canadians prefer to relax, entertain and work from home. A renovation offers tremendous opportunities to create a home that reflects the way they like to live and contributes to their enjoyment of life.

Alternatively, many people undertake renovations to make their property more attractive to sell. These renovations can help in speeding up the sale of a property or getting a better price.

Others simply renovate to increase the property value.

Depending on the scale of your renovation, there are a number of ways to finance your home improvements.

For smaller projects, you might want to consider paying cash or personal borrowing. By this we mean obtaining loans or revolving credit lines that you’d get at a retail bank and that are not tied to, or secured, against any assets.

For example:

  1. Credit cards – easy to get and convenient for smaller projects, but interest rates can be high to very high, and unpaid/outstanding balances can impact your ability to qualify or requalify for a mortgage.
  2. Personal line of credit – easy to get, interest rate typically lower at prime rate plus 2 or 3%, and because it’s revolving, you can pay it off and then re-use it.
  3. Home improvement loan – gets you funds up front at a competitive interest rate, and typically offers a structured repayment plan to make sure you pay the loan off in a specified time frame, say 1 to 5 years.
  4. Deferred Payment Plan – typically used to purchase a particular product, such as a garage package or large appliance. Attraction is little or no payments for 1st year, but be careful, as the rates are typically approaching 29.9% after that, typically just a high-interest credit card in disguise.

The trick with the above noted examples is keep the renovation small and understand what it is going to take on your part to repay the debt in a given time frame.

For larger projects, you may want to consider borrowing against the existing equity in your home, or the equity you can create doing smart renovations.

Some examples of this are:

  1. HELOC or Home Equity Line of Credit – works much like a personal line of credit, typically at prime rate +, and you can borrow the money up to your limit whenever you want and repay as you wish.
  2. Mortgage Add-On (2nd mortgage) – this is a loan on top of your existing mortgage. You must repay this loan in addition to the required payments on the original mortgage. Comes at a higher cost than a HELOC.
  3. Refinance with Equity-Take-Out – this means you replace your existing mortgage with a new mortgage up to 80% of the property’s appraised value. You end up with a lump sum of cash at the beginning of your project and can spend it as you see fit.
  4. Refinance Plus Improvements – this is a way to get 80% lending based on the NEW “as-improved” value of your property, not the existing value as in the above methods. This means access to more cash for extensive renovations, but you get the money as the improvements are completed and inspected, not before.
  5. Purchase Plus Improvements – when you are buying a home, this is a way to get money in excess of the purchase price to be used for specific renovations as agreed to as part of the purchase mortgage financing. The extra funds available are based on the new “as-improved” estimated value of your property, in excess of the original purchase price.  This means access to cash for extensive renovations, such as new roof, new kitchen, new bath, new windows and doors, etc.

NOTE: Initial set-up costs may also include legal, appraisal fees and/or Broker/Lender Fees.

Purchase Plus Improvements and Refinance Plus Improvements

Rather than purchasing a new built home, many of our clients are purchasing properties in desirable locations, and then renovating them. Some already own their property and want to do updates (Refinance Plus Improvements). This could entail something as simple as removing carpet in every room of the house and putting in hardwood floors throughout, or as detailed as putting in a basement suite to help generate rental income.

In order to apply for this product, you’d need to provide detailed quotes for the project, outlining the scope of the work to be done and the cost. It’s important to get quotes from contractors and stores for the work involved with all actions and materials clearly described. If construction permits are required, make sure you know that you can obtain them and be able to provide evidence of this. The lender will then review your project and then determine how much the renovations improve the value of the home (not the cost of the improvement).

Upon mortgage approval, the lender advances the “value” of the improvements (less the borrower’s required percentage) to the borrowers’ lawyer’s trust account to remain there until the work is completed and inspected. Once that has been completed, the lender will authorize the lawyer to release the “hold back funds” to you. Multiple advances (or draws) may be available for larger projects, but generally there is only one advance at the end of the project.

It’s important to note that you, the borrower, must complete the improvement on a timely basis before you receive the funds. This means either you can cover the improvement costs yourself, or the contractor will carry the costs until after project is complete or inspection done. NOTE: Lenders generally offer a 60 – 90 day window to complete the improvements/renovations.

If you are thinking about doing a renovation project (big or small), give us a call and let’s review your financing options.

Canada’s mortgage stress test rate drops, third time since pandemic began

Jackie Bowen Uncategorised August 17, 2020

Canadians saw their buying power increase last week when the central bank’s rate fell for the third time this year to 4.79% (from 4.94%), easing a key stress test faced by borrowers.

While most borrowers do not pay anything close to the benchmark posted rate for a mortgage, the rate is used when assessing borrowers as part of a financial stress test.

With this move you’ll be able to qualify for just a little more than you could before.

A family with an annual income of $100,000 and a 10% down payment would have qualified for a home valued at $523,410 under the 4.94% qualifying rate. Under the new qualifying rate of 4.79%, they can now afford $531,230.

If you’d like to know what impact this drop has made on your qualification, please give me us a call.

CMHC tightens requirements for homebuyers

Qualifying for a mortgage is about to get harder for anyone who doesn’t have at least a 20% down payment for the purchase of a home. Canada Mortgage and Housing Corporation (CMHC) is tightening its rules to qualify for an insured mortgage.

Starting July 1st, 2020, CMHC will be implementing the following changes:

  • Establish minimum credit score of 680 for at least one borrower (up from 600)
  • Limiting the Gross/Total Debt Servicing (GDS/TDS) ratios to standard requirements of 35/42
  • Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes. In other words, buyers will no longer be able to borrow money for a down payment.

CMHC is also suspending refinancing for multi-unit mortgage insurance, unless the money is being used for repairs or reinvestment in housing.

At this time CMHC is the only insurer who has noted the implementation of these changes. So the question remains, will Genworth and Canada Guaranty follow suit or will they continue to be competitive?

Be sure to stay tuned..

Mortgage Deferral Contact Information

Jackie Bowen Education March 20, 2020

As part of extraordinary measures to help customers struggling with the financial impacts of the novel coronavirus pandemic Canadian mortgage lenders will allow mortgage payment deferrals for up to six months.

With the release of this news earlier this week, these lenders have experienced higher than normal call volume and are doing their best to facilitate all calls and are reviewing all applications on a case-by-case basis.

If you are looking to see if a mortgage payment deferral is an option available to you, it’s important to remember that you are officially declaring ‘financial hardship’ to your lender. Some lenders may question how in just one week or so you are already in a position where you are unable to make your mortgage payment so be prepared to support your claim by having the following information/documentation available:

– Have your Mortgage Statement, or mortgage reference number, on hand
– Have your paystubs and T4’s ready
– Have your explanation to the representative ready with details as to how your job is affected by the Covid-19 crisis

Be sure to follow their directions on what you need further to submit and apply for this. And before ending the conversation, be sure to ask them when you should call again to follow up. As it takes a few days to process your request, it’s important to know when you should follow back up on your claim with them.

We cannot process this claim for you as the lender wants to see how the Covid-19 crisis has impacted you directly.

If you need any help on how to apply for this, please let us know and we can help guide you.

Bank Of Canada Drops Key Interest Rate By 1/2 Point

Jackie Bowen Education March 10, 2020

The Bank of Canada doesn’t always follow the U.S. Federal Reserve, but it did last week.

The BoC lowered its target for the overnight rate by 50 basis points to 1¼ percent.

Like the U.S. central bank, Canada’s policy-makers cited the spread of COVID-19 for pulling the trigger on its first interest-rate cut since 2015. It also made sure it was clear to everyone that more stimulus is possible.

“Before the outbreak, the global economy was showing signs of stabilizing,” the Bank of Canada said in a statement. “While Canada’s economy has been operating close to potential with inflation on target, the COVID-19 virus is a material negative shock to the Canadian and global outlooks, and monetary and fiscal authorities are responding.”

The impact on what this announcement makes on the banks and its consumers will be seen in the days to follow.

For more information on the announcement click here.