Tapping into Your Homes Equity

The amount you may be able to access depends on your home's appraised value, the balance of your existing mortgage and any other financing secured against the property.

In Canada, homeowners may generally be able to borrow up to 80% of the appraised value of their home through certain forms of home equity financing, subject to lender approval.

For example, if your home is appraised at $800,000, 80% is $640,000. If you currently owe $500,000 on your mortgage, the theoretical remaining room within that limit would be $140,000. The actual amount available could be lower depending on your income, credit, debts, property and the lender's requirements.

Before planning a renovation around a specific amount, it is useful to confirm both the property's value and how much additional borrowing you can realistically qualify for.

It depends on how much you need, how quickly you expect to repay the money and the terms of your existing mortgage.

A mortgage refinance can provide a lump sum and may be useful for a larger renovation project. The additional borrowing is incorporated into mortgage financing and can be repaid over a longer period. Refinancing can also involve costs such as a mortgage penalty, appraisal, legal work or registration fees.

A home equity line of credit, or HELOC, provides revolving access to funds. You can generally borrow, repay and borrow again up to the approved limit, which can be useful when renovation expenses occur in stages. HELOCs generally have variable interest rates.

Under current federal guidance, a HELOC may generally provide access to up to 65% of a home's appraised value, subject to the lender's requirements and any other financing secured against the home.

Compare the interest rate, fees, payment requirements, repayment period and flexibility of both options before choosing one.

Potentially. Certain mortgage programs can allow eligible buyers to finance approved improvements as part of the mortgage rather than paying for the entire renovation separately after closing.

For example, CMHC's Improvement program can allow eligible renovation costs to be considered as part of the property's expected value after the work is completed. The lender may require renovation estimates, improvement lists, plans or building permits to support that value.

The lender will also need to approve the borrower, property and proposed improvements. Depending on the program, renovation funds may be advanced according to specific conditions rather than being provided as unrestricted cash at closing.

If you are considering buying a home in Nanaimo, Parksville, Nanoose, Ladysmith or elsewhere on Vancouver Island that needs significant work, it is worth reviewing renovation financing before making the offer.

Often, yes. Because the amount of home equity available depends partly on the property's value, a lender may require an appraisal before approving a refinance, second mortgage, home equity loan or HELOC.

The appraisal helps the lender determine the current market value of the property and calculate how much total financing can be secured against it.

For renovation financing, the lender may also need information about the expected value of the home after the improvements are completed. CMHC's Improvement program, for example, can require documentation such as renovation estimates, plans or permits to support the proposed as-improved value.

An appraisal is only one part of the approval. The lender will still review your income, credit, debts and overall mortgage application.

Using home equity can provide access to lower-cost financing than some unsecured loans or credit cards, but the money is secured against your home.

Before borrowing, consider the renovation budget, expected cost overruns, interest rate, fees, monthly payment, repayment period and how the additional debt fits into your longer-term finances.

It is also worth keeping a contingency fund for unexpected renovation expenses. CMHC recommends allowing room for unexpected costs so that you do not have to renegotiate your financing or apply for additional borrowing partway through the project.

Borrowing against home equity increases the debt secured by your property. If payments cannot be maintained, there can be serious consequences, so the goal should be to borrow an amount that remains manageable even if renovation costs or household expenses change.