How to: Finance a renovation

(Unsecured) Personal Line of Credit
These popular lending vehicles have flexible repayment terms and fixed or variable interest rates, making them useful for projects where you’ll be paying as-you-go or in installments. PLCs allow you to borrow up to a prearranged limit and pay off all or a portion of the balance each month above a minimum (which is usually fairly small).

Secured Line of Credit, Home Equity Loan
Similar to loans and PLCs, but with lower interest rates, since the equity in your home (i.e., its total value less the cost of your mortgage) is used as collateral or security. This can be a great low-cost source of funds, but it’s really a type of second mortgage, with all the drawbacks that entails, including the possibility of foreclosure if you default.

Mortgage refinancing
Refinancing your existing mortgage allows you to spread the payments over a much longer period of time, usually at a lower rate even than a secured PLC, and gives you access to as much as 80% of your home’s appraised value. Costs may include legal and appraisal fees, and sometimes penalties, which you should weigh against the cost of other borrowing options. Another option is to allow extra funds for renovations when you take out a new mortgage, such as when you purchase a new home.

Reverse mortgage
Financial advisors generally advise against these mortgages, as they are really nothing more than highly restrictive regular mortgages that you don’t make payments on, so interest on them compounds unhindered -- to the advantage of the lender. If you want to borrow against your home’s equity, you’re probably better off with a new mortgage, home equity loan or secured line of credit.

Sources: David Potter, Potter & Partners Inc., Toronto; CMHC.

Read more in Homes and Renovating