By Alisa & Jorge Aragon, Mortgage & Leasing Experts
With low interest rates – now is an ideal time to tap into the available equity in your home to fund your renovation needs. But these rock-bottom rates won’t be available forever – the Bank of Canada estimates fixed mortgage rates will likely begin to rise this summer.
As a homeowner, you understand the importance of maintaining your home to ensure it ages well with the times. But you also know that it can be daunting when you think about all of the ongoing costs for renovations and maintenance required to keep your home to your liking.
The good news is, if you have built up equity in your home, refinancing your mortgage is a cost-effective way to have funds available for the renovation of your home.
One refinance strategy that mortgage consumers often use involves extending their amortization period – to a maximum of 30 years – so they can lock into an excellent fixed rate for their mortgage and renovation expenses.
In addition to setting you up with a new lower mortgage payment, your mortgage expert can also find a lender that offers the most flexible prepayment privileges.
If you choose to refinance, it’s important to note that there may be penalties for paying out your existing mortgage loan prior to renewal, but these penalties will be offset by a lower interest rate and, at the same time, you can access extra money to put towards your renovations.
By refinancing, thanks to lower interest rates, even though you’re taking on more debt, you can pay your mortgage off faster. Most mortgage products, for instance, include prepayment privileges that enable you to pay up to 25% of the principal (the true value of your mortgage minus the interest payments) in lump sum payments per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money.
Some lenders also allow consumers to pay anywhere from an extra 25% of their monthly mortgage payment to up to double the payment.
Using Home Equity Line of Credit (HELOC)
Another option to enable you to access funds for renovations is to take out a HELOC on your primary residence. , a refinance at today’s low rates is your best option.
- Lower interest rates than credit cards or other high-interest means of accessing funds.
- Access to equity on an add-needed basis and you only pay interest on the portion that you use.
- Pay the HELOC off at any time without a penalty.
- Substantial savings versus using a credit card or loan. HELOC at 4% interest, compared to 18% for a credit card or loan.
- Lower payments. For instance, a $50,000 credit card balance with a 3% monthly payment means $1,500 must be paid each month in comparison with the interest-only payment on the HELOC, you’re only required to pay approximately $167 per month, based on an annual interest rate of 4%.
There are also combination mortgage products available that enable you to have a portion of your mortgage in a fixed interest rate and another portion as a HELOC, which mean that it can be used as a rainy day fund.
When looking to access home equity, it’s best to speak to your mortgage broker to find an option that suits your unique needs.