With interest rates sitting at “emergency” levels – low rates never before seen by your parents and even your grandparents – now is an ideal time to tap into the available equity in your home or cottage to fund your renovation or landscape needs. But these rock-bottom rates won’t be available forever – the Bank of Canada estimates fixed mortgage rates will likely begin to rise this summer.
As a cottage owner, you understand the importance of maintaining your cottage and property to ensure it ages well with the times. But you also know that it can be daunting when you think about all of the ongoing costs for renovations and maintenance required to keep your cottage to your liking – especially if you also own a primary residence.
The good news is, if you have built up equity in your primary residence or even your cottage, refinancing your mortgage is a cost-effective way to have funds available for upgrades to your home away from home.
One refinance strategy that mortgage consumers often use involves extending their amortization period – to a maximum of 35 years (with no age discrimination on this product) – so they can lock into an excellent 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.
If you choose to refinance, it’s important to note that there may be penalties for paying out your existing mortgage loan prior to renewal, but these penalties will be offset by a lower interest rate and, at the same time, you can access extra money to put towards your cottage renovations.
By refinancing, thanks to lower interest rates, even though you’re taking on more debt, you can pay your mortgage off faster. Most mortgage products, for instance, 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.
Using a line of credit
Another option to enable you to 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 lower than credit cards or other high-interest means of accessing funds, a refinance at today’s low rates is 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 the improvements. In other words, a HELOC enables you to access equity on an add-needed basis and you only pay interest on the portion of the HELOC that you use. Another benefit is that you can pay the HELOC off at any time without a penalty.
There are also combination mortgage products available that enable you to have a portion of your mortgage in a fixed interest rate and another portion as a HELOC, which mean the HELOC can be used as a rainy day fund.
By using a HELOC to fund renovations, etc, the savings are substantial versus using a credit card or loan. Just the comparison of paying 3.25% interest with a HELOC compared to 18% for a credit card or loan clearly shows the HELOC advantage.
The other savings is 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’re only paying interest on the loan.
For instance, 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 will lend on year-round property up to a maximum loan to value (LTV) of 95% (which means you will 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 is marketable. Your lender will want to know they will easily be able to sell your property if you do not continue paying your mortgage or HELOC.
When looking to access home equity, it’s best to speak to your mortgage broker to find an option that suits your unique needs.