How to pay for a home renovation

Start with the real budget

Before choosing how to pay, make sure you know what you are paying for. Add a contingency of 10 to 15 per cent for what the walls reveal, and remember the costs outside the contract, such as appliances, furniture, window coverings and somewhere to live during a major project. Our free renovation planning workbook has a budget sheet, and our cost calculator gives Calgary planning ranges.

This is general information, not financial advice. Talk to your bank or a mortgage professional about your own situation before you sign a construction contract.

Savings

Paying from savings costs nothing in interest and keeps your borrowing room free for surprises. Many people combine savings for part of the project with a line of credit for the rest, so they are not draining their emergency fund.

Home equity line of credit

A home equity line of credit, or HELOC, is a revolving line secured by your home. You borrow what you need, when you need it, and pay interest only on what you have used, which suits a renovation paid in stages. The Financial Consumer Agency of Canada notes that you may borrow up to 65 per cent of your home's value on a HELOC, and lenders generally limit total borrowing against the home, including the mortgage, to 80 per cent of its value.

Rates are usually variable, so payments can rise. Because the line is secured by your home, it is important to have a plan to pay it down.

Refinancing your mortgage

Refinancing replaces your mortgage with a larger one and gives you the difference as cash. It often has a lower rate than a line of credit and a fixed payment schedule. If you break your mortgage before the end of its term, you may pay a prepayment penalty, so refinancing often makes the most sense at renewal. Lenders will want an appraisal, and the new mortgage is generally limited to 80 per cent of the home's value.

Purchase plus improvements

If you are buying a home that needs work, some lenders offer a purchase plus improvements mortgage. The cost of agreed renovations is added to the mortgage, based on the expected value after the work. The lender usually holds the renovation money and releases it once the work is done and inspected, so you need a firm quote from your contractor before you close.

Personal loans and credit cards

Unsecured loans and credit cards are quick but carry much higher interest rates. They can cover a small gap or a short delay, but they are an expensive way to pay for a large renovation.

Credits and programs that help

A few federal tax credits and rebates can return part of the cost, especially for accessibility work, a suite for a senior relative or a home rebuilt so substantially that it counts as new. Our guide to whether home renovations are tax deductible explains them. In Calgary, the City's Clean Energy Improvement Program has offered financing for energy upgrades repaid through the property tax bill, so check whether it is open when you plan.

How payments to your builder should work

• In Alberta, a business that takes money before the work is done, under a contract signed away from its own premises such as in your home, needs a prepaid contracting licence. You can check a licence with the Province.
• You also have the right to cancel within 10 days of receiving your copy of a prepaid contract.
• Pay in stages tied to progress, not most of the money up front.
• Get a written contract with the price, the payment schedule and how changes are approved and priced.
• Keep invoices and receipts. Some credits need them, and they help when you sell.

Related guides

Read which renovations add the most value when you sell and where to save and splurge in a renovation to decide where the money goes.