Financing Options
Even with cash on hand, you may prefer to finance all or a part of the job. The cost and scope of the work as well as the negotiated terms of payment will help you determine the type of credit that best suits your needs.
To apply for most forms of credit, you'll need your completed version of our Net Worth Calculator and our Budgeting Calculator.
Most lenders will use these numbers to calculate your Total Debt Service (TDS) ratio, or the percentage of your total monthly expenses relative to your gross (pre-tax) monthly income. Generally speaking, your total monthly expenses should not exceed 37% to 40% of your gross income. Most financial institutions follow this rule when determining the amount that you are able to borrow.
The formula for calculating your TDS ratio is:
Or you can use our TDS calculator.
Credit Cards
Using your credit card to purchase materials is a convenient way to pay for projects you do yourself. If you use your card and pay your account in full each month by the due date, you'll have the benefit of a short-term, interest-free loan.
Because of the higher interest rates associated with credit cards, if you carry a high balance over a longer period of time, you will likely pay higher financing costs than had you taken out a loan for the same amount.
On the plus side, credit cards offer flexible repayment terms which are not available through personal or home improvement loans.
Line of Credit
A line of credit offers you immediate access to some or all of a pre-determined amount of cash whenever you need it. You pay interest only if and when you use it and then only on the portion that you use. Interest rates on a line of credit are lower than most other forms of credit, making it a good choice if you're going to carry a balance for more than a few months. Most people like the convenience of a line of credit because they don't have to reapply whenever they need additional funds. Once set up, a line of credit is always available as long as you maintain your credit in good standing.
Personal Loan
A personal loan allows you to borrow a specific sum of money and repay it over a specified period of time, and you pay interest from the day your loan is deposited in your account, even if you don't use it immediately. Interest rates are generally higher than those charged on a line of credit, but less than those charged on credit cards.
Home Improvement Loan
Government subsidies usually come in the form of a home improvement loan, which is similar to a personal loan extended by a financial institution. These loans are often financed through a government agency rather than a financial institution and, terms may be particularly attractive if you qualify. Check with your municipal building department or local home builders' association to find out if any are available in your area.
Increasing Your Mortgage
If you already have equity established in your home - i.e. the current market value of your home is more than what you owe on it - you may be able to "add-on" to your mortgage to finance your renovations. You can generally increase your mortgage up to a maximum of 75% of the current appraised value of the home.
If mortgage interest rates are different at the time you negotiate the add-one financing than at the time you took out your mortgage, your financial institution will take both interest rates and "blend" them into a new rate that's somewhere in between the two. You may incur out-of-pocket expenses to obtain and register the new mortgage and for an up-to-date appraisal of your property. These costs can vary depending on where your home is located and where your mortgage is registered. Your financial institution can provide you with full details.
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