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Second Mortgages To Finance Home Renovations

Jul 12, 2008
Second mortgages are allowing Canadians to realize their home renovation aspirations. Canadian homeowners have accumulated significant equity in their homes as housing prices have increased year after year in what has been, until recently, the hottest housing market this country has witnessed since the end of the Second World War. Now that the housing market has cooled, however, Canadians are using some of the equity they have built up to finance significant upgrades to their homes through renovations.

The Canadian Mortgage and Housing Corporation tracks home renovation trends across Canada. Recently released statistics from the CMHC show that Canadians spent close to $19.7 billion last year in the 10 major urban centers that were surveyed. Overall, 37% of the households surveyed reported that they had completed some form of home renovation in 2007. Canadians reported that the main reasons they undertook renovations were "to update, add value, or to prepare to sell their home."

Most Canadians- about three quarters - paid for home renovations from their savings; however, 20 per cent of home renovators paid for their renovation project with a credit card or line of credit. Not surprisingly, the average amount spent on renovations paid for with credit was higher than the amount spent from savings - $13,500 versus $11,200.

Indications are that these trends will continue in 2008, as two out of five respondents in Canada's five largest regional centers - Vancouver, Calgary, Toronto, Montreal and Halifax - indicated that they were planning on undertaking home renovations in 2008. With a cooling housing market, and house prices forecast to grow only marginally in 2008 and 2009, home renovations represent one way in which homeowners can act to build in value to their homes.

Home renovations make sense either to enhance the enjoyment of one's home or to increase its curb appeal in an emerging buyers' market, but homeowners using savings or, worse yet, credit cards to finance major home renovations risk depleting their assets. Far better, to arrange a second mortgage or line of credit secured against your home's existing equity when undertaking a major home renovation project.

While savings or credit card debt can readily finance a minor renovation project such as remodeling a bathroom or painting and wall papering - two of the most popular projects according to the CMHC -when undertaking a major renovation, like building an addition or finishing a basement, it makes sense to use a second mortgage secured against existing home equity as second mortgages carry a much lower interest rate than most credit cards. Moreover, second mortgages can be structured as construction loans, where money is borrowed in "draws"or stages as each phase of a major renovation is completed, cutting down the interest you pay during the renovation process.

Second mortgages are available from commercial banks and trust companies, as well as from a wide pool of other financial institutions and private lenders. Generally, they will carry a marginally higher interest rate than a first mortgage, but their carrying costs need not be prohibitive. If you are contemplating major home renovations and plan to finance renovations through a second mortgage, working with an experienced and well-resourced Canadian mortgage broker can help you access favourable terms and interest rates that may not be commercially available from your bank, credit union or trust company.
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