Home Renovation Loans in Canada

What are Home Renovation Loans?

Just as there are numerous types of renovation projects for you to consider, there are also multiple renovation loan sources that you can choose from to finance your home renovation. The five types of home improvement loans are:

• Home equity line of credit (HELOC)
• Home equity loan
• Mortgage refinance
• Personal loans
• Credit cards

These financing options all allow you to borrow money to renovate your home. However, each option is different in terms of how much you can borrow, how difficult it is to borrow, and how much it will cost to borrow. For example, these home renovation financing options can have differing credit score requirements, income requirements, credit limits, and interest rates. This means that the option that works best for you will depend not only on your project size and length, but on your financial situation. You can use one or a combination of these loans and financing options to finance your renovation project, such as using your credit card while you wait for your HELOC application to be approved.

The main things to consider when comparing home renovation financing options are:

• The cost to borrow
• How much you can borrow
• How difficult it is to borrow

Types of Home Improvement Loans

Home Renovation Loans by Interest Rate

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Home Equity Loan

A home equity loan is a secured loan for a fixed amount of money that you borrow based on your home equity. Home equity loans allow you to borrow a large amount of money at a low interest rate, which makes them great for large home improvement projects that require a substantial upfront payment. However, home equity loans require you to have home equity to borrow against. If you don’t have at least 20% home equity, you won’t be able to borrow through a home equity loan.

Home Equity Line of Credit (HELOC)

A HELOC is similar to a home equity loan in that you’re borrowing based on your home equity, but instead of borrowing a fixed amount of money, you are given a credit limit instead. You can borrow as much or as little as you need at any time up until you reach your credit limit, and you will only pay interest for the amount that you borrow. Coupled with low HELOC rates, the flexibility of HELOCs make them a great choice for on-going projects that have costs spread out over a period of time. This allows you to only borrow money when you need it. Just like a home equity loan, you’ll need to have at least 20% home equity to borrow with a HELOC if you have a mortgage, or at least 35% home equity for standalone HELOCs.

Using your HELOC to make purchases can be easy with some lenders that offer access or bank cards. This allows you to buy items for your home renovation directly from your HELOC online or in-store. HELOCs with access cards are just as convenient as credit cards, but they have a much lower interest rate and often a much higher credit limit. The minimum monthly payment for a HELOC can also be lower than credit cards, with the minimum for a HELOC being just the interest for the month. In comparison, credit cards may require you to pay at least 1% of your balance every month, plus interest.

Mortgage Refinance

A cash-out mortgage refinance involves you replacing your current mortgage with a new mortgage that has a higher mortgage balance. The difference between your new and old mortgage balance is the amount that you are borrowing. You will be able to use this amount to pay for your home renovations.

Depending on when you refinance your mortgage, you may or may not be charged penalties or fees. If you refinance during your term, your mortgage lender will charge mortgage prepayment penalties for breaking your mortgage. You can avoid break penalties if you refinance at the end of your mortgage term when it is up for renewal. If you refinance with another lender, you will also be charged a discharge fee by your current lender.

A refinance lets you borrow at low mortgage refinance rates, though you will also be limited to a maximum refinanced mortgage of 80% of your home’s value. However, for larger projects or building a new home you may consider a home construction loan.

Credit Cards

Borrowing from a credit card isn't ideal if you aren't able to pay it back quickly, with credit cards having very high interest rates. If your home improvement project is small, such as it costing only a few thousand dollars, a credit card might be an option for you to easily finance your project for a short period of time. If you can’t pay it back soon and will need to pay your loan off over a longer period of time, using a credit card to finance home renovations wouldn’t be such a good idea. However, credit cards have a 21-day grace period meaning there is no interest for a few weeks. Some people will use their cash back credit card to finance renovations while they wait for their next paycheck.

Store Financing Programs

Many home improvement stores in Canada offer store credit cards for customers. These credit cards may offer additional perks, such as a longer return period, extended warranties, and even special offers and promotions. If you’re planning on doing a smaller DIY project and you want an easy way to finance your renovation project, getting a store credit card can be easy and quick.

The largest home improvement retailer in Canada is Home Depot, followed by Lowe's. Home Depot, Lowe's, Rona, and other national home improvement stores offer credit services and financing programs for customers. In most cases, you don’t need to be a professional or a commercial contractor in order to qualify for these programs.

Most store financing programs use third-party companies. For example, BMR Group, a hardware store company in eastern Canada, uses Desjardins Accord D financing. Castle Building Centres works with Flexiti for instant financing. Timber Mart works with Fairstone Financial.

At certain retailers, you can spread out your purchases over monthly payments through buy now, pay later (BNPL) programs offered through PayBright.

Home Depot

Home Depot offers a consumer credit card, project loan card, and commercial credit services. Anyone can apply for Home Depot’s consumer credit card or for a project loan. For commercial customers, Home Depot offers a commercial revolving card and a commercial account. The revolving card works like a credit card, while the commercial account works like a charge card, which requires the balance to be paid each month. Home Depot commercial members with a Pro Business Account and Pro Xtra Rewards may also qualify for no interest for 60 days on some purchases with the Commercial Revolving Card or Commercial Account.

• Interest Rate: 28.80%
• Extended return period of 1 year
• No interest with minimum purchase offers

Home Depot works with Citi Cards Canada (Citibank) to offer the Home Depot Consumer Credit Card. It's easy to apply for the card online or in-store, and it provides benefits such as an extended return period of 365 days (1 year) for a full refund. This is longer than the 90 day return period offered if you use any other payment method. The Home Depot credit card also provides special promotions to cardmembers. One thing to note is that the items that you purchase using the Home Depot Credit Card will be used as security interest for the card balance, or in other words, as collateral. If you fail to make your credit card payment, then Home Depot can repossess the items that you have purchased using the card.

In March 2020, the interest rate of the Home Depot Credit Card increased from 23.25% to 28.80%. Currently, the interest rate for the Home Depot Credit card is 28.80% per year, which is very high. It's also higher than regular consumer credit cards. This credit card has no annual fee. To make up for the high interest rate, the card has various offers for those that just need temporary financing for their renovation purchases.

When you sign up for the Home Depot Credit Card, you can receive $100 off your first purchase of $1,000 or more within 30 days of getting your card. The card also offers no interest charged if you pay the card's balance in full within 6 months for any purchase of more than $299. After 6 months, interest will be 28.8%. If you purchase a major appliance or have an installed project that is more than $299, you can get the no interest offer for 12 months.

There are also rotating offers that feature no interest for 18 months for some categories. For example, purchases of $1,999 or more for HVAC systems between October 14, 2021 and December 8, 2021 will have no interest for 18 months.

How much would it cost to borrow $10,000 with the Home Depot Credit Card? The annual interest rate is 28.80%. If you were to borrow for one year:

• Borrowing Amount: $10,000
• Interest Rate: 28.80%
• Term: 1 Year

The total interest cost for one year would be $2,880, assuming that the balance remains at $10,000 throughout the entire year. The minimum monthly payment is 1% plus interest. In this case, the minimum monthly payment for the first month would be $100 plus $240 interest. The card does have a 25 day grace period, which means that if you pay the balance in full before the grace period is over, then no interest will need to be paid, assuming that there were no interest charges from the previous month.

• Interest Rate: 8.99%
• Borrow up to $50,000 with no down payment
• 6 months to make purchases, to be paid off over 5 years

Home Depot offers a loan that can be used for project purchases with a lower interest rate than their store credit card. You can borrow up to $50,000 with no down payment to be used towards purchases at Home Depot, both in-store and online. You cannot use the project loan to purchase items or supplies from any other retailer or store. You have six months to make your purchases. After the purchase period, repayment of the project loan is spread out equally over 60 months, which is five years.

The annual interest rate of the project loan is 8.99%, and there are no annual fees. In February 2020, the interest rate for the Home Depot Project Loan increased from 6.99% to 8.99%.

You can make prepayments towards your project loan with no penalties, and even pay it off in full early. If you need more than six months to make your project purchases, you can apply for additional project loans for more time.

Let’s say that you want to purchase $10,000 of construction supplies from Home Depot. With the Project Loan, you can borrow $10,000 at a rate of 8.99%, and you can pay this off over 5 years. How much would it cost to borrow using Home Depot’s Project Loan?

• Borrowing Amount: $10,000
• Interest Rate: 8.99%
• Term: 5 Years

Using an interest calculator, the required equal monthly payments would be $208. Over the 5-year term, the total amount to be repaid is $12,452. That equals to $2,452 interest paid for a $10,000 Project Loan.

Lowes

• Interest Rate: 28.80%
• No interest for 6 months for purchases of $299 or more
• Get a one-time 10% discount when you apply in-store

The Lowe’s consumer credit card has no interest offers that are similar to the Home Depot credit card. There's no interest for 6 months if you purchase $299 or more, plus no monthly payments are required during this time. For appliances and other select categories, you can have up to 12 months with no interest or payments required. If you need more time to pay, you can get up to 48 months to pay off purchases of $1,499 or more with an interest rate of 8.99%. Lowe’s credit cards are serviced through Synchrony Financial Canada. When you apply in-store, you can receive a one-time discount for 10% off your purchase, for up to $100 off.

• No interest for 60 days
• Get a 5% everyday discount of all products
• Get an initial one-time 10% discount when you apply in-store

If you’re a commercial customer, Lowe’s business account credit card gives you 5% off all purchases. You will also get a 10% discount off one purchase, for a maximum discount of $100. For larger businesses, Lowe's offers an account receivable commercial account that makes it easier to control your employee spending and to track purchases.

Rona

Most of Rona's financing products, including the Rona Visa Desjardins credit card and Rona Commercial products, were discontinued in January 2021. Currently, Rona only offers various payment plans for purchases.

For all home improvement purchases, you can get 2 months of 0% interest through Rona's multi purchase plan. For purchases of $99 or more, you can get 0% interest for 3 months, or 6 months of 0% interest for purchases of $299 or more. Rona also offers equal instalment plans. You can pay in 24, 36, 48, or 60 equal monthly instalments.

The interest rate of Rona's instalment plan depends on the purchase amount. For example, purchases of more than $2,500 can get 24 monthly instalments at an interest rate of 4%, while purchases less than $2,500 have an interest rate of 13.5%. Financing from Rona is provided by Desjardins Accord D.

Since the annual interest rate of Rona's monthly instalments depends on your borrowing amount, how much would it cost to borrow $2,000 compared to $3,000?

Borrowing $3,000 for 2 years or 3 years will cost less interest compared to borrowing $2,000. It would cost $285.57 to borrow $3,000 for three years, while it would cost $443.34 to borrow $2,000 for three years. For five years, it would cost $727.77 to borrow $3,000, compared to it costing $485.18 to borrow $2,000.

Should I Get a Home Renovation Loan?

There are benefits to renovating your home besides just adding value to your home. A home renovation can improve your quality of life and may address necessary repairs and upgrades. This can mean making your home more energy efficient and saving you money by lowering your energy and water bills, or even making your home more comfortable or safer. The icing on top of this is that home renovations often add value to your home, which may return back in a higher home selling price compared to the cost of the renovations. A newly renovated home may also make your home more attractive to buyers.

If you can afford the costs of renovating your home, which can include the monthly payments towards any home renovation loan, then it might be a good idea to renovate your home if you have a particular goal in mind. Renovation loans allow you to borrow money to finance your renovations, which means that you don’t need to come up with all of this money upfront. Some types of financing, such as store credit cards, have special offers that allow you to pay zero interest for a select number of months. This can be used as temporary financing while you get more longer-term financing in place. Even regular credit cards have a grace period that has no interest if you pay it off in full.

However, the money borrowed from a renovation loan will still need to be paid back eventually. HELOCs and second mortgages give you access to a large amount of money, which can tempt you to overspend and go over your budget. Having a set budget ahead of time is important to make sure that you don’t spend more than you can afford. Since renovation loans are loans, not free money, it might not be a good idea to renovate your home now if you can’t comfortably afford any additional loan payments in the first place.