Home renovations can improve your lifestyle and add to the value of your property. Unfortunately, home improvements can be expensive. If don’t have enough savings to finance your home renovations, you can consider taking out a home improvement loan to cover the costs.
In this guide, we’ll take you through some of the financing options available, as well as the benefits and drawbacks so you can find the right loan for you.
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How does a home improvement loan work?
Depending on the type of renovations you’re doing, there’s a variety of loans available for home improvements. These loans all have key features and differences, so it’s important to compare your options to find the best one to suit your needs.
Secured or unsecured. If you have some equity in your house, you can consider getting a home equity loan. This option uses your home equity as collateral for the money you borrow. If you don’t have enough equity in your home, or if you don’t want to use it as collateral, you can get an unsecured loan. Additionally, you can use something less valuable, like your car or motorbike, as collateral.
Fixed or variable rate. Providers of home improvement loans may offer you a choice between a fixed and variable – or floating – interest rate. With fixed rate loans, your repayments remain the same throughout the loan term. If you opt for a variable rate loan, your rate may start out lower but can fluctuate over the life of your loan. The interest rate for variable rate loans usually depend on what’s known as the the Prime Rate.
4 features to consider when exploring home improvement loans
If you’re interested in getting a loan for home improvements, make sure you consider the following factors:
Security. You need to have enough equity in your home to get a secured loan. Alternatively, you may be able to use a vehicle as security for the loan, such as your car, boat, RV or motorbike, providing the value of the vehicle is sufficient. You will usually need to own the vehicle outright. You can also apply for an unsecured loan, but you may be charged a higher annual percentage rate of interest (APR).
Interest rate. This is the amount of interest you’ll pay on the money you’ve borrowed for your home improvements. Secured loans tend to come with lower interest rates than unsecured loans because it’s less of a risk for the lender since you’ve put up collateral.
Loan term. A longer loan term will give you lower ongoing repayments, but at the end of the loan term, you will have paid more in interest, making the loan more costly. In contrast, higher repayments and a shorter loan term help keep the overall cost of the loan down.
Processing time. Some lenders can disburse your funds on the same day you apply or usually by the next business day. Other lenders may take seven to ten days to approve your application and disburse your loan funds.
How much do home improvements cost?
By the time you factor in materials and labour, home improvements are pricey. Here’s a breakdown of some of the average costs of common home improvements.
Improvement
What it involves
Average cost
Adding square footage
Removing walls to expand the interior of a home or apartment.
$7,000–$100,000
Basement remodeling
Putting down a floor, building walls, installing electric and plumbing lines.
$10,000–$30,000
Plumbing
Hiring a plumber to replace old pipes or install new plumbing systems.
$30–$50/hour + materials
Electric work
Hiring an electrician to redo part of your wiring.
$28–$50/hour + materials
Permits
Getting permission to start construction.
Around $200
Solar energy
Buying and installing solar panels
$20,000–$35,000
Benefits and drawbacks of financing home improvements
Carry out time-sensitive repairs. A home improvement loan lets you carry out repairs as soon as possible. Postponing repair work until you’ve saved the money can result in more damage, which can also lead to more expensive repairs.
Various loan options. No matter what type of home improvement you’re looking at doing, you have a range of loan options to choose from. These include home equity loans, home equity lines of credit, unsecured or secured personal loans and personal lines of credit.
Taking on too much debt. If you apply for a loan you can’t afford to pay off, you run the risk of taking on debt you can’t manage and negatively affecting your credit score if you make late repayments. Make sure you budget for your repayments before you apply for a loan.
Finance doesn’t account for renovation budgets or schedule changes. If anything happens that affects the budget or schedule of your renovations, it could impact your ability to make your loan repayments on time. Make sure you have some space in your budget so that you can still make repayments if anything unexpected happens and you need extra funds.
What to avoid when getting a home improvement loan
You should avoid the following when taking out a loan for home improvements:
Unplanned or poorly considered renovation projects should be avoided at all costs. This is especially true if you’re planning to finance it with a loan. Home improvements often involve long and expensive processes, and you need to be financially prepared to cover it.
If you think you’ll make late payments on your loan, look for another financing solution. Making late repayments can result in the lender reporting you to the credit bureau, which means your credit score will take a negative hit. Furthermore, your loan will end up costing you a lot more in fees.
If you think you may have problems repaying the loan entirely, don’t take one out in the first place. Look for alternate forms of financing, like borrowing money from friends or family.
Representative example: Jan finishes his basement
Jan has been setting aside money for years in order to finish his basement. He has $10,000.00 but has realized he will need at least another $9,000.00 to pay for contractors and supplies. The physical materials will cost him approximately $14,000.00, while labour will cost around $5,000.00. With an excellent credit score of 810, Jan heads to his bank and is approved for a loan for $10,000.00 – borrowing an extra $1,000.00 will ensure he can cover any unexpected expenses.
Cost of supplies/labour
$19,000.00
Loan type
Personal loan
Loan amount
$10,000.00
Interest rate
5.00%
Loan term
2 years
Additional fees
Origination fee of 3.00% ($300.00)
Monthly payment
$438.71
Total loan cost
$10,729.13
*The information in this example, including rates, fees and terms, is provided as a representative transaction. The actual cost of the product may vary depending on the retailer, the product specs and other factors.
How to apply for a home improvement loan
You can usually apply for a loan online, however some lenders may also offer phone or in person applications if they have a physical branch location. Before you apply for a loan, you’ll need to make sure you meet the eligibility requirements. If you have the necessary documents on hand, you can usually apply for a loan in around ten minutes or less.
Eligibility requirements
Requirements may vary between lenders, however the criteria usually include:
Be 18 years of age, or the age of majority in your province or territory
Be a Canadian citizen or a permanent resident with a valid Canadian address
Have a working bank account
Have proof of an income
Meet any credit score requirements
Required documents
When applying for a loan, you’ll typically need to have the following documents on hand:
Personal information. This includes your full name, address, date of birth, email, phone number and Social Insurance Number (SIN).
Income details. You will have to provide proof of your income from pay stubs or bank statements.
Employment details. You may need to provide the name of your employer and their contact information.
Banking details. This includes your bank’s name, address, transit number and your personal bank account number.
Frequently asked questions
With a home improvement loan, you receive all of the funds as a lump sum payment, usually directly into your bank account. You then have to pay interest towards the entire amount borrowed. Your repayment terms will be set out in your loan contract, which may involve making weekly, bi-weekly or monthly repayments.
A line of credit gives you access to a pre-determined credit limit. You’re then able to draw on the funds up to that limit when you pay for your renovations. You only pay interest on the funds you actually use, and if you make repayments on your credit limit, you can then use those funds again.
Home improvement loans are available for people with bad credit scores, however you will likely pay a higher interest rate than someone who has good or excellent credit. You might have a better chance of being approved if you apply for a secured loan, which means you will need to offer up collateral, such as your car or home equity, in order to secure a lower interest rate and be seen as a less risky borrower.
A home improvement loan can be used for either your investment property or your primary place of residence. Some loan providers won’t ask what you’re using the funds for, as long as you use them for a legitimate purpose. Others may have you specify what you will use the loan for.
Aliyyah Camp is a writer and personal finance blogger who helps readers compare personal, student, car and business loans. Aliyyah earned a BA in communication from the University of Pennsylvania and is based in New York, where she enjoys movies and running outdoors.
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