Londoner loves their DIY and a home renovation is always an exciting experience! It is also one of the most stressful projects that one could undertake. In fact, it is said that a renovation project can be the test of a true relationship - only a strong relationship can survive a renovation!
While the mess is happening and the stress mounts, few people take the time to really evaluate just how they’re going to finance their project. Maybe you have already completed your renovation or have accumulated debt from other purchases or life expenses. With time being scarce and decisions needing to be made, most people will just go to their bank branch and do one or a combination of the following:
Get a loan
Get a line of credit
Use their credit and finance cards
Increase the mortgage
Get a loan
Applying for a loan is just as lengthy as getting a full fledged mortgage, but you often will get the money into your hands within a few days. The biggest drawback of a loan is that the interest rate is usually 2% or so above what a mortgage or Home Equity Line of Credit would be. You now have a fixed payment that can bite into your lifestyle cash-flow. Loans are fully open and can be paid off without a penalty and they ensure that you are paying back your debt in a structured way. Larger loans require some sort of security such as a car, but if your car is leased or already borrowed, you’ll have no such luck with a loan.
Get a line of credit
Applying for a line of credit requires a stronger credit history, but the bank will sell you on the premise that lines of credit are “flexible” and “re-usable”. This is to their advantage because the minimum payment on a line of credit DOES fluctuate with the prime rate and that doesn’t necessarily mean that you’ll pay the debt off any quicker! The majority of society has every intention to pay off their line of credit, but BECAUSE it is FLEXIBLE, most borrowers will start off paying aggressively, but go right back to the minimum payment when some other expense comes up such as a vehicle repair! Banks view lines of credit as “anchor products” meaning that they tie you to the bank because the line of credit is non-transferrable. If you want to get a new line of credit at a new bank, you’d have to reapply all over again! Let’s face it, most of us are simply too busy to focus on how to get rid of the debt on a line of credit, so it just becomes part of our lifestyle expenses - accepted and unquestioned!
Use credit or finance cards
As enticing as the 1.99% rate is for the next 10 months, your credit card company knows that the majority of people will NOT pay their debt off before the introductory rate expires. This results in a debt that goes from 1.99% up to 19%. (Notice how the decimal simply shifts!) At these rates, credit card debt and those “don’t pay for 100 years” most likely will come back to haunt your cash-flow!
Increase the mortgage
A mortgage is the biggest debt one will ever have, and that is why most people are so reluctant to take on additional debt and add it to their existing mortgage. We tend to think that if our mortgage is going down that we are doing well with our finances, even though we are accumulating extra debt with loans, lines of credit and credit cards! Wake up people! Debt is debt no matter how you slice it! The biggest fact about debt is that the more you slice it into different products, rates and terms, the less control you have over it! Adding a renovation project to your mortgage can lower the overall rate cost of the project AND protect your cash-flow by having ONE manageable payment that has an amortization with a projected debt-freedom date.....we have even noticed that adding to your mortgage at a lower interest rate can keep your mortgage payments roughly the same.
However, banks make money when they offer what is called “blended rate” mortgages. This means that they’ll take the extra funds and blend those to the existing contract, creating a “blended” rate with no penalty. On the surface, this method seems great - no penalty and you get the money for the renovation project. When you dig deeper, you might notice that your bank is disguising the penalty into the blended rate and even making some extra on top of that! In some cases, the banks are blending your new mortgage funds at the posted rates and NOT the deep discounted rates you should be entitled to.
So what do you do?
Hire a professional mortgage broker (such as us - yes, we’re biased) to calculate what your existing mortgage lender is offering you to blend, versus what the market rates are including paying the penalty and adding it to the debt! 50% of the time it works out that a customer will save thousands of dollars more by paying a penalty versus avoiding it, BUT MAKE SURE it is on paper! If either the bank or your broker cannot produce the savings in writing with a calculation comparison, find someone else!
The final detail you need to know about adding a renovation project to your mortgage or doing a debt consolidation is that it will cost you legal fees. This should be factored into the cost comparisons of doing a loan, a line of credit or a mortgage. A really good mortgage broker should be able to tell you when you’re better off taking a loan, than increasing your mortgage!
Thanks for reading!
Your London, Ontario Mortgage Brokers at Dominion Lending Centres Forest City Funding FSCO# 10671