Have you been wanting — and putting off — some much-needed renovations? We all have a dream home in mind, but time, effort, and money can be major roadblocks.

Fortunately, a home renovation loan can help you overcome those hurdles and make your dream home a reality. But it's crucial that you understand what you're getting into—that's where we come in.

In this guide, we'll cover:

• How home renovation loans work
• 3 options for home improvement lenders
• Eligibility requirements for home improvement financing
• Tips for getting approved for a home improvement loan
• Steps to apply for home improvement lending
• Common mistakes to avoid with loans for home improvement
• Tips for choosing the right house renovation loan
• Some key points about home renovation loans and taxes

By the way — do you want to skip the busywork of comparing lenders to find the best rates and options? Lotly can take care of it for you. We work with our cross-country network of loan providers to find the fairest secured loans for homeowners like you. Give us a try today. 

How home renovation loans work

Home renovation loans are just another type of financing. They’re designed to help homeowners like you cover the costs of remodeling or renovating their homes.

These loans can help you add to your home, update old features, or make needed repairs. Home renovation loans are usually secured loans, meaning they require collateral in case the borrower defaults on the loan.

What’s the best way to finance home renovations in Canada? You have a few options:

1. Home equity loan

A home equity loan is a type of loan that allows homeowners to borrow against the value of their home. During this process, you use your home's equity to get a loan. (This is calculated by subtracting what you owe on your mortgage from your home's current value).

The pros of this type of loan include:

• Lower interest rates compared to personal loans (6-16%, depending on client circumstances)
• Lump sum payment that you can use for any home renovation project

The cons include:

• Using your home as collateral, which puts it at risk if you are unable to make payments
• Closing costs and fees associated with the loan

2. Home equity line of credit (HELOC)

Similar to a home equity loan, a HELOC also allows homeowners to borrow against their home's equity. However, instead of receiving a lump sum, a HELOC works more like a credit card where you have access to a line of credit that you can draw from as needed.

The pros of this type of loan include:

• Flexibility in borrowing only the money you need for your home renovation project
• Lower interest rates compared to personal loans (6-16%, depending on client circumstances)

The cons include:

• Variable interest rates that can fluctuate over time
• Like a home equity loan, using your home as collateral — which puts it at risk if you cannot make payments

3. Personal loan

Personal loans are unsecured loans, meaning they do not require any collateral. These types of loans are usually based on the borrower's credit history and income.

The pros of this type of loan include:

• No collateral is needed, so your home is not at risk if you cannot make payments
• Fast approval process and quick access to funds

The cons include:

• Higher interest rates (19-45%) compared to home equity loans or HELOCs (6-16%)
• Limited borrowing amount based on credit history and income
• Failure to make payments against growing interest rates may eventually force you to sell off assets like your home or vehicle to cover loan costs

Overall, the best type of loan for home renovations will depend on your financial situation and personal preferences. Before deciding, it's important to carefully consider each option's pros and cons.

You may also want to consult with a financial advisor or lender to determine the best course of action for your specific needs. Additionally, researching and comparing rates from multiple lenders can help you secure the best deal possible. 

And by the way — if you need any assistance with that, Lotly works with over 50 secured loan providers from across the country to find you the safest, most stable loan available.

3 options for home improvement lenders

1. Renfi

Renfi offers home renovation loans secured as a second mortgage. The process is entirely online, with quick approvals and funding within 72 hours.

• Pros:some text
  • Quick application and approval process
  • Allows interest-only payments initially
  • Bad credit accepted
  • No need to discharge your first mortgage
• Cons:some text
  • Limited to homeowners who can use their home as collateral
• Amount: $15,000 - $150,000, or more upon request
• Interest Rates: RenFi fixes interest rates at 1% monthly for interest payments only; this annualizes to approximately 12%. 
• Best For: Homeowners looking for a quick and flexible financing option, especially those with less-than-perfect credit (RenFi). This loan is a better option for when you need short-term financing and you can pay off the principal of the loan quickly — but not for longer-term projects, where your interest expenses may start to rise.

2. Scotiabank

Scotiabank provides home renovation financing through personal loans, lines of credit, and the Scotia Total Equity Plan (STEP), which lets you borrow against your home equity.

• Pros:some text
  • Offers both secured and unsecured options
  • Competitive interest rates
  • Flexible repayment terms
• Cons:some text
  • Requires a good credit score for the best rates
• Amount: Variable, depending on the product you choose and the value of your home equity.
• Interest Rates: Varies; secured loans generally offer lower rates.
• Best For: Homeowners with equity in their homes looking for a trusted, well-established bank​ (Scotiabank).

3. CIBC

CIBC offers the Home Power Plan®, which combines a line of credit with a mortgage and personal loans for home renovations. Both secured and unsecured options are available.

• Pros:some text
  • Access to ongoing funds with the Home Power Plan
  • Flexible repayment options
  • Lower interest rates if secured by home equity
• Cons:some text
  • Requires home equity for the best rates
• Amount: For their HELOC, you'll need a minimum draw of $10,000
• Interest Rates: Competitive, with lower rates for secured options.
• Best For: Homeowners needing flexibility and access to funds over time​ (CIBC).

Eligibility requirements for home improvement financing

Before applying, it's important to understand the eligibility requirements of home renovation lenders. These can vary depending on the lender and the type of loan you're applying for. Generally, lenders will consider factors such as:

• Credit score and credit history. A good credit score can help you secure better rates and terms.
• Income and debt-to-income ratio. Lenders want to ensure that you have the income to make your loan payments on time.
• Equity in your home. Some lenders may require a minimum amount of equity in your home before offering a loan or line of credit.
• Proof of ownership. You'll need to provide documentation showing that you own your home, such as a mortgage statement or property tax bill.
• Documents related to the renovation project. This can include estimates from contractors, building permits, and other relevant paperwork.

It's important to note that each lender will have their own specific eligibility requirements, so it's best to check with them directly before applying.

Tips for getting approved for a home improvement loan

While each lender will have their own specific requirements, there are some general tips that can increase your chances of getting approved for a home renovation loan:

• Have a good credit score: A higher credit score shows lenders that you are responsible with managing debt and may result in better interest rates.
• Show proof of income: Lenders want to ensure that you have enough income to afford the loan payments.
• Keep debt levels low: Having a high debt-to-income ratio can make it difficult to get approved for a loan.
• Have a clear renovation plan: Lenders may want to know exactly what the funds will be used for and how it will increase the value of your home.
• Provide necessary documents: Make sure to have all required documents ready when submitting your application, such as proof of income, bank statements, and renovation plans.
• Consider a co-signer: If you have a low credit score or high debt-to-income ratio, having a co-signer with good credit can improve your chances of getting approved.
• Shop around for lenders: Different lenders may offer different terms and rates, so it's important to compare multiple options before deciding on one.
• Have a realistic budget: Make sure to have a realistic budget in place for your renovation project and stick to it. This can show lenders that you are responsible with managing money.
• Be prepared for an appraisal: Lenders may require an appraisal of your home to determine its current value, so make sure your home is in good condition before applying for a loan.
• Consider other financing options: If you are having difficulty getting approved for a traditional renovation loan, there may be alternative options such as personal loans or lines of credit that could work better for your situation.

What might some alternative financing options be? Let's get into it:

Home renovation loans vs. other financing options: compared

Home renovation loans vs. credit cards

Credit cards can be a convenient way to finance small home renovation projects.

• They offer quick access to funds.
• Often have rewards programs that can benefit homeowners.

However, credit cards typically have higher interest rates than other financing options. If you plan on carrying a balance on your credit card, the interest charges can quickly add up and make the project more expensive in the long run.

Home renovation loans vs. personal savings

Personal savings are another option for financing a home renovation project. While it may seem like an ideal choice since there are no interest charges associated with it, it may not always be feasible to use all of your savings for one project.

Additionally, using all of your savings can leave you vulnerable in case of unexpected expenses or emergencies.

Home renovation loans vs. cash-out refinancing

Cash-out refinancing involves replacing your existing mortgage with a new one with a higher balance to access the equity in your home. This option can provide you with a large sum of money at once, making it suitable for larger home renovation projects.

However, it also means taking on a larger mortgage and potentially paying more in interest over time. Pro tip: consider the interest rate on your existing mortgage first — if it’s higher than the current market rate, refinancing is a great option to get a lower rate and save more money. 

Common mistakes to avoid with loans for home improvement

• Taking out more than you can afford: It's important to have a clear budget and stick to it when taking out a home renovation loan. Taking on more debt than you can comfortably handle can lead to financial strain and potentially even defaulting on the loan.
• Not researching interest rates: Different lenders offer different interest rates, so it's crucial to shop around and compare offers before deciding on a lender for your home renovation loan. A slight difference in interest rate can make a significant impact on the total cost of the project. (If that sounds like too much work, though, don’t worry—Lotly can do the research and heavy lifting for you.)
• Not considering additional fees: Along with interest rates, there may be other fees associated with a home renovation loan, such as origination fees, appraisal fees, or closing costs. When comparing loans from different lenders, factor these into your budget. 
• Not understanding the terms and conditions: It's important to carefully review the terms and conditions of a home renovation loan before signing any paperwork. Make sure you understand the repayment schedule, interest rates, and any potential penalties for early payment or late payments.
• Not having a solid plan: Before taking out a home renovation loan, it's essential to have a clear plan for how the funds will be used and what renovations will be done. Without a solid plan, you may end up overspending on unnecessary or unplanned projects.

Tips for choosing the right house renovation loan

When selecting a home renovation, use this checklist to think about  your options:

1. Consider the amount of money you need to borrow
2. Understand the repayment terms and interest rates for each option
3. Think about all the factors involved in home equity financing to see if it’s the right option for you.
4. Explore other financing options such as credit cards, personal loans, or savings before choosing a home renovation loan
5. Shop around and compare offers from different lenders to find the best deal for your situation
6. Read the fine print and understand all fees associated with the loan
7. Make sure you have a solid plan for repaying the loan on time and in full

By carefully considering these factors, you can make an informed decision on which type of financing is best for your home renovation project. Remember to always borrow responsibly and within your means to avoid any financial strain in the future. 

Carefully weigh all your options and choose the one that works best for you and your financial situation. After all, a home renovation should improve your living space, not add unnecessary stress to your life. 

Steps to apply for home improvement lending

1. Research and compare lenders to find the best option for your needs.  Look at factors such as interest rates, repayment terms, and any additional fees or charges.
2. Gather all necessary documents. This may include proof of income, credit score, and details about your renovation plans and budget.
3. Fill out the application form provided by the lender. Be thorough and accurate in your responses to increase your chances of approval.
4. Submit all required documents along with your application. Depending on the lender's process, this may be done online or in person.
5. Wait for a decision from the lender. This can take anywhere from a few days to a few weeks.
6. If approved, carefully review the terms and conditions of the loan. Make sure you understand all fees, repayment terms, and any penalties for late payments.
7. Sign the loan agreement and receive your funds. Once you have signed the agreement and completed all necessary paperwork, the lender will transfer the funds to your account.
8. Begin your home renovation project! With a home renovation loan in hand, you can turn your dream project into a reality.

Don't forget — have a solid plan for repaying the loan on time and in full to avoid any financial strain in the future.

Important points to know about home renovation loans and taxes

• Interest on home renovation loans can be tax deductible. If you're using a HELOC or a home equity loan, interest payments can be tax-deductible when the loan is used to 'buy, build, or substantially improve' the collateralized property.
• If you rent out part of your renovated home, you may also be eligible for tax deductions related to depreciation and repairs. Consult with a tax professional to determine what expenses are eligible for deductions.
• For tax purposes, keep thorough records of all expenses related to your renovation project. This includes receipts, invoices, and any other documentation that may be needed to support deductions or claims.
• Consult with a tax professional for specific information and advice regarding your circumstances. Tax laws and regulations are constantly changing, so it's important to stay informed and seek professional guidance when necessary.

Renovate the home of your dreams with Lotly

Let's quickly recap everything we've learned:

• Home renovation loans provide financing for remodeling or repairing a home and come in several forms: home equity loans, home equity lines of credit (HELOCs), and personal loans.
• Tips for getting approved: Maintain a good credit score, provide proof of income, keep debt levels low, have a clear renovation plan, gather all necessary documents, consider a co-signer, and shop around for lenders.
• Steps to apply: Research and compare lenders, gather needed documents, complete the application accurately, submit all documents, wait for lender's decision, review and sign the loan agreement, and receive funds to start your renovation.
• Tax considerations: Interest on home renovation loans may be tax-deductible if used to improve the property. Renting out part of your renovated home could also offer tax deductions. Keep detailed records of all renovation expenses and consult a tax professional for advice.

Taking on a home improvement project can be daunting, but with this guide, you’re equipped to handle anything the process throws at you. 

Looking for a secured way to finance your renovation? Lotly has you covered. We work with 50+ lenders from across Canada to find the best deal for your financial situation, taking into account your credit score, home equity, and more.

That's how we ensure you get the most personalized, stable options for secured home renovation loans. Book a free consultation today to see if it's the right fit for you.

FAQs

Do I need to have good credit to qualify for a home renovation loan?

A good credit score can increase your chances of being approved for a home renovation loan and may result in more favorable interest rates.

What if I don't have enough equity in my home for a secured loan?

There are options available, such as unsecured personal loans or government programs specifically for home renovations.

Can I use the funds from a home renovation loan for other purposes?

It is not recommended to use the funds from a home renovation loan for anything other than the intended purpose. This could result in financial strain and difficulty repaying the loan.

Are there any tax benefits for taking out a home renovation loan?

Sometimes, the interest paid on a home renovation loan may be tax deductible. For specific information about your situation, consult with a tax professional.

Is it better to finance my home renovation project or pay in cash?

It depends on individual circumstances and financial goals. When making this decision, it is important to consider interest rates, repayment terms, and the potential impact on your credit score.

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