Financing Renovations Through Your Mortgage in Quebec

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Financing renovations through your mortgage is a common strategy in Quebec that allows homeowners to access more favourable interest rates than those on personal loans or unsecured lines of credit. Three main options are available to homeowners: mortgage refinancing, a home equity line of credit (HELOC), and a renovation loan integrated into the mortgage. Refinancing involves breaking or renewing an existing mortgage for a higher amount, using the equity accumulated in the property. Under OSFI Guideline B-20 rules, refinancing is permitted up to 80% of the property's market value. If your home is worth $500,000 and your mortgage balance is $300,000, you could potentially refinance up to $400,000, freeing $100,000 for renovations. A HELOC functions as a revolving line of credit secured by your property, offering withdrawal and repayment flexibility ideal for staged renovation projects. The integrated renovation loan, offered by some lenders and through CMHC programs (Home Improvement program), allows the cost of work to be included in the initial purchase loan. Each option carries distinct fees (prepayment penalty, appraisal fees, legal fees) that the mortgage broker must detail for the client. It is important to note that renovations financed through the mortgage increase your total debt and must be carefully planned so that the added value generated justifies the investment.

Why finance renovations through your mortgage?

Residential renovations in Quebec often represent investments of $20,000 to $100,000 or more. Financing these projects through your mortgage typically allows you to obtain an interest rate significantly lower than a personal loan (often 5% to 8%) or a credit card (19% to 22%). A mortgage refinance or secured line of credit can offer rates of 4% to 6%, depending on market conditions, which considerably reduces the total cost of the work.

Option 1: mortgage refinancing

Refinancing involves replacing your current mortgage with a new loan at a higher amount. The difference between the two amounts is paid out in cash and can be used to fund your renovations. Under OSFI Guideline B-20, you can refinance up to 80% of your property's market value. The lender will require a professional appraisal to confirm the current property value. If you refinance before your term expires, a prepayment penalty will apply.

Option 2: home equity line of credit (HELOC)

A HELOC is a revolving line of credit secured by your property. It works like a standard line of credit but at a lower preferential rate thanks to the real estate collateral. You can borrow and repay at will, and interest applies only to the outstanding balance. A HELOC is particularly suited to staged renovation projects, as you draw funds as needed. The combined limit of your mortgage and HELOC cannot exceed 80% of the property value, and the HELOC portion is limited to 65%.

Option 3: purchase plus improvements loan

For buyers acquiring a property that requires work, some lenders offer a purchase plus improvements program. This loan integrates the purchase cost and renovation budget into a single mortgage. CMHC allows insurance on this type of loan, provided the improvements add value to the property and the total amount does not exceed the post-renovation appraised value. Renovation funds are generally held in trust and disbursed in stages upon presentation of invoices or verification of work progress.

Assess your renovation needs: Obtain detailed quotes from licensed contractors (RBQ licence in Quebec) to establish a realistic budget for your work.
Calculate your available equity: Déterminé the current market value of your property minus your mortgage balance. You can access up to 80% of the market value.
Compare financing options: Evaluate refinancing, HELOC, and renovation loan options with your broker. Consider penalties, fees, and interest rates for each option.
Plan the disbursement: Organize payment stages with your lender and contractor. For a renovation loan, funds are generally disbursed in tranches upon work verification.
Keep documentation: Retain all invoices, contracts, and payment proofs. These documents will be needed for staged disbursement and may be useful for a future sale.

Tax considerations

For a principal residence, mortgage interest used to finance renovations is generally not tax-deductible in Canada. However, if the property is a rental, mortgage interest related to renovations that generate or maintain rental income is deductible as an operating expense. It is recommended to consult an accountant or tax specialist to optimize your renovation financing strategy.

Frequently Asked Questions

What is the difference between refinancing and using a HELOC for renovations?

Refinancing replaces your mortgage with a new loan at a higher amount, with a fixed or variable rate and regular payments on the new balance. A HELOC is a revolving line of credit where you use only what you need, and you pay interest only on the amount used. A HELOC offers more flexibility for staged projects, while refinancing is better suited for a single project with a defined amount.

Up to what percentage of my property value can I refinance?

Under OSFI Guideline B-20, refinancing is permitted up to 80% of the property's market value. For example, if your property is worth $500,000 and your mortgage balance is $280,000, you could access up to $120,000 in equity ($400,000 minus $280,000).

Are there penalties if I refinance before the end of my term?

Yes. If you refinance before your mortgage term expires, you will owe a prepayment penalty. For a variable rate, this is generally three months of interest. For a fixed rate, it is the greater of three months of interest or the interest rate differential (IRD). This penalty can amount to several thousand dollars.

Can I finance renovations in my loan at initial purchase?

Yes, some lenders offer a purchase plus improvements program that integrates renovation costs into the initial mortgage. CMHC also offers a renovation program eligible for loan insurance. The total loan amount cannot exceed the post-renovation value as appraised by an expert.

What fees should I expect for a refinance?

Typical fees include the prepayment penalty (if applicable), property appraisal fees ($300 to $500), notary fees ($750 to $1,500), discharge fees for the existing mortgage, and registration fees for the new mortgage. Your mortgage broker can estimate these costs precisely.