Homeowners need to weigh pros and cons of their financing options

With still-low interest rates in Canada, the return on money parked in a bank account or a guaranteed investment certificate is typically at or below the current level of inflation, meaning money placed there is losing purchasing power. “Unless you’re willing to invest your savings into something that carries a bit of a risk, the returns for savings vehicles are very low right now,” says Stephanie Morrison, mobile banking specialist with the CUA credit union. “GICS come with a return of one- to two-per- cent.”

CREDIT CARDS

Credit cards can be a convenient way for many homeowners to pick up building supplies for smaller renovation jobs but come with big financing costs unless the balance is cleared off immediately.

“I wouldn’t recommend it just because of the high rates on credit cards,” said Morrison. “A credit card will normally charge 19 per cent interest.”

HOME RENOVATION LOAN

Straightforward, unsecured home renovation loans based on the applicant’s credit scores are another option to finance the cost of renos. At CUA, someone with a fairly good credit score of 650 can currently get a three-year home renovation loan at 9.5 per cent. Those with stellar credit can get rates as low as eight per cent at that credit union but anyone with a credit score under 600 can pay up to 13 per cent interest on such a loan.

It’s certainly not the cheapest source of financing for a home renovation. And it can be a bit awkward to handle as it comes with a need to report all expenses back to the credit union.

“We need all the quotes for the exact work they want to do and, if they’re working with a contractor, it has to be someone that doesn’t mind being paid after the work is done,” said Morrison.

LINE OF CREDIT

Lines of credit are easier on homeowners, both in terms of interest rates and paperwork, than a home renovation loan.

“If you have (an unsecured) line of credit, life is easier because you can pay people as you go and only pay interest on what you use,” of the line of credit, said Morrison. “The rates start at 7.35 per cent for really good credit and go up to 12.85 per cent for scores under 600.”

Anyone looking for a line of credit at CUA with a fairly good but not quite excellent credit score of 650 can currently secure this financing for 8.85 per cent interest.

STORE FINANCING

Financing can also be had through many hardware stores.

“Stores like Kent Building Supplies and Rona typically offer a line of credit, so you can get all your supplies from them … and some of them do labour as well,” said Morrison.

Kent Building Supplies’ store card comes with no annual fee and no interest for six months, so it can be a good deal for short-term financing. On most items – excluding those covered by special promotions – the Kent card starts charging 29.9 per cent interest on balances still outstanding after six months, making it relatively costly financing for anyone who takes longer to pay off their credit cards.

HOME EQUITY LINE OF CREDIT

An even less expensive route to finance a home renovation is to get a home equity line of credit where the financing is secured by the value in the property. On a house appraised at $200,000, for example, a homeowner would be able to get a line of credit for 80 per cent of that value, or $160,000, minus any amount still owing on it. If there is a mortgage with $50,000 still owing on the property, that would reduce the amount available for a home equity line of credit in this example to $110,000.

“The rates are much lower,” said Morrison. “We’re looking at 4.1 per cent up to 6.6 per cent.”

A homeowner with a credit score of 650 would qualify for a home equity line of credit carrying an interest rate of 4.6 per cent at CUA, she said.

Another big plus for financing with a home equity line of credit is that it allows homeowners who may not have as good a credit rating to qualify.

“I’ve seen it for scores that are much lower than 575,” said Morrison. “Having security, changes a lot.”

GO GREEN LOAN

Currently, the lowest interest rate at CUA is for its Go Green financing for energy- efficient home renos and vehicle purchases. These come with interest rates as low as 3.99 per cent and terms of up to five years amortized over up to a decade. Go Green loans are typically used for such things as the purchase and installation of heat pumps or solar panels.