Can your home equity help finance your cottage improvements?
With interest rates still sitting at low rates, it could be an ideal time to tap into the available equity in your home or cottage to fund your next renovation or landscape needs to help maintain your cottage and property through the seasons.
This upkeep, however, can be daunting when you add up the ongoing costs for renovations and maintenance required to keep your cottage to you and your family’s liking – especially if you also own a primary residence in the city. There are a few ways you can do that, outlined below.
The good news is that you can refinance your mortgage in a cost-effective way if you have built up equity in your primary residence or, even, your cottage. By looking into refinancing options, you could help free up available funds for the upgrades to your summer cottage.
One refinance strategy that mortgage consumers often use involves extending their amortization period – to a maximum of 30 years (with no age discrimination on this product) – so they can lock into a more convenient fixed rate for their mortgage and renovation expenses.
In addition to setting you up with a new lower mortgage payment, your mortgage professional can also find a lender that offers the most flexible prepayment privileges.
Should you choose to refinance, consider that there may be penalties for paying out your existing mortgage loan prior to renewal. These penalties, however, could be offset by a lower interest rate which could allow you access to extra money to put towards your cottage renovations.
By refinancing during times of lower interest rates, you could potentially pay your mortgage off more quickly despite taking on more debt. Many mortgage products, for example, include prepayment privileges that enable you to pay up to 20% of the principal (the true value of your mortgage minus the interest payments) in lump sum payments per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money.
Some lenders also allow consumers to pay anywhere from an extra 20% of their monthly mortgage payment to up to double the payment.
Line of Credit
Another option to help access funds for cottage renovations is to take out a home equity line of credit (HELOC) on your primary residence. Although HELOC interest rates are often lower than credit cards, or other high-interest means of accessing funds, a refinance at lower rates could be your best option.
A HELOC is a good tool for those who know they want to renovate their cottage in the future but do not know exactly when they want to make those improvements. In other words, a HELOC enables access to equity on an add-needed basis and you would pay interest on the portion of the HELOC used. You would also be able to pay off the HELOC at any time without penalty.
There are also combination mortgage products available that would enable you to have a portion of your mortgage in a fixed interest rate and another portion as a HELOC, potentially allowing you to use the HELOC as a rainy day fund.
By using a HELOC to fund renovations instead of using a credit card or loan, you could save substantially. Just the comparison of paying approximately 3.25% interest with a HELOC compared to approximately 18% for a credit card or loan demonstrates the advantage of exploring a HELOC.
Other savings are seen in your monthly repayment of the debt. With loans or credit cards, the minimum is typically 3% of the total balance, whereas with the HELOC you would only be paying interest on the loan.
For example, a $50,000 credit card balance with a 3% monthly payment means $1,500 must be paid each month. With the interest-only payment on the HELOC, you’re only required to pay $135 per month.
If your primary residence does not have enough equity for a refinance or HELOC but your cottage does, you still have options depending on whether your cottage is a vacation property (year-round with road access) or seasonal.
Financial institutions could lend on year-round property up to a maximum loan to value (LTV) of 95%, meaning you would only have to have 5% equity remaining in your second home.
Most mortgage financing products are available for year-round cottages as long as the property is in good shape and marketable. Your lender will want to know how easily they would be able to sell your property should you discontinue payments on your mortgage or HELOC.
When looking to access home equity, speak to your mortgage broker to find an option that suits your unique needs.