Financing your Home Addition
It is a common predicament not having enough money to afford building the home of your dreams. This dream quickly turns into a nightmare once you start thinking about the triple-whammy of expensive homes in Toronto, increased interest rates in Canada, and massive debt-to-income ratios that Canadian’s currently average. Fortunately, there are tried and true ways to get the money needed to finance your home addition/renovation project, so your dreams of your future home do not turn into a nightmare after all.
Using your savings to finance your home addition makes sense if you have enough money saved up. Why deal with the interest involved in borrowing if you do not have to? Even though the interest rates are still relatively low does not mean that you still have to pay more money through borrowing. If you have been maxing out your TFSA and/or have done well with your investments over the years then this is the first place you should look when finding extra cash.
Banks have programs that allow you to get financing specifically for home additions/renovations. The two most common debt instruments available at banks for this purpose are personal loans and a line of credit. A personal loan is a good idea if you know exactly how much money you are going to need to renovate. Although, personal loans usually come with fixed payment schedules (i.e. monthly payments), and are not as flexible as other forms of debt.
A line of credit is a more flexible option, especially if you own your home. You can take out a home equity line of credit that uses the equity that you have built up in your home to finance your home addition/renovation. This method of using your home as security may result in lower interest payments.
Additionally, you can always refinance your existing mortgage, but this may come with penalties for “breaking” the terms on the contract. Depending on whether you have a variable or fixed interest rate mortgage, this refinancing could make sense, with the variable interest usually having a lesser penalty than it’s fixed income counterpart. For more information on the approximate cost of the penalty of breaking your existing mortgage click here. Sometimes the penalty is minimal enough that it makes sense to refinance. Make sure you do your research when deciding if this option will work for you.
Construction Financing Companies
There are many companies in Toronto that specialize in financing people who would like to renovate their home. These companies provide various solutions including personal and home equity loans, but also provide second mortgages so that you do not have to break your current mortgage.
The 3 F’s
You can always borrow from what is called the 3 F’s; Friends, Family, and Fools. This is a classic phrase that defines the easiest money to get access to in an entrepreneur’s world, and can work very well if you have affluent people in your network willing to loan you money. This may allow you to obtain a lower interest rate than if you were to go to a bank, especially if your credit score is weak.
About the Author
Business Development, BVM Contracting
A graduate of chemical engineering from Queen's University, Ryan has spent many summers working with BVM Contracting in various roles and projects. This experience has provided him with a unique view on the residential construction industry which he loves sharing with you!