Can your home loan cover renovations?

Are you planning a home renovation? There are several mortgage types you can take advantage of to fund the costs of renovations, so consider this option before you drain your savings and get stuck with a half-finished kitchen remodel.

Mortgage increases or refinancing

If you have a straightforward renovation planned with a predictable cost and currently have a considerable amount of home equity, you may be able to go back to the well and simply increase your mortgage amount. This is the best course of action if you have a favourable home financing rate, and may even open the door to refinancing at more favorable terms.

You'll have to work with your financial institution to draw out cash from the loan, which is typically limited to an amount less than the difference in equity and what you originally owed. You'll also want to consider if refinancing for a larger total will significantly increase either your monthly payment or the life cycle of the loan.

• Best use case: Small to medium renovations with carefully assessed costs may make this the best choice. Most people who use this option have a long term plan for the home, either as a permanent residence or as something to hold on to as property values increase before selling at a profit.

Construction loans

A construction loan is a specialty mortgage: It pays your builder directly through the construction process, and can be a good option if you need a substantial, expensive renovation. Instead of a lump sum, the loan pays out in installations as the builder makes progress, keeping renovations moving along and requiring accountability.

You can borrow for a construction loan based upon the final post-renovation value of your home, and defer interest until the update is complete. However, approval can be more complicated than other kinds of mortgages, and require you and your builder to submit plans to the lender.

• Best use case: This is best for properties that are increasing in value, and that you have future plans for to justify a massive renovation. The construction loan can be monitored carefully, and you'll have yhour lender involved in the process to help keep the builder motivated and within budget.

Alternatives to mortgages for home renovation

If a mortgage isn't the best option, you have alternatives. Keep in mind that these may be easier and faster to obtain the funds you are seeking, but come with a higher interest rate and shorter term payoff requirements.

Lines of credit

You can use the equity in your home for a line of credit. This can be convenient, as it streamlines your ability to access your funds and you can use them for whatever you want, but the interest rate on this kind of credit can be much higher than that of a traditional home loan. However, if you also have other needs that a line of credit could solve, this might be the easiest way to handle your home renovation needs.

A personal loan

A personal loan can be either secured by an asset, such as a vehicle, or unsecured and tied to no assets at all. If your renovation is small, your credit is good, and you just want to complete the reno quickly  – either for comfort or to sell your home at a higher profit – this could be the easiest course. However, the interest rate can be high, so you'll want to pay off the loan as quickly as possible.

If you buy a home that needs a renovation, consider talking to your lender about adjusting the loan to provide for that necessity.

Seeking a house that you can turn into a home? Contact Ray White Surfer's Paradise and we can help you find and purchase the right property to fulfill your needs and desires.