Should I refinance to renovate or invest?

In Canada, refinancing to renovate or invest can make sense when you can comfortably carry the larger payment and the benefit clearly outweighs the cost of borrowing. The cost of borrowing includes any penalty to break your mortgage. Refinancing makes less sense when the payment would strain your budget, the penalty is large, or the investment's return is uncertain.

Refinancing to renovate

Borrowing against your home to improve it is common. The questions to ask are practical:

• Do you need the money all at once? A contractor who wants payments in stages may suit a HELOC better than a lump-sum refinance.
• Will the work add value, or only comfort? Both are valid reasons, but only one is likely to show up when you sell.
• Is your term ending soon? Refinancing at renewal avoids a prepayment penalty.

Some lenders also offer a "purchase plus improvements" or renovation-based refinance, where they lend on the expected value after the work. Renovation-based refinances have their own conditions and draws.

Refinancing to invest

Using home equity to invest, whether in another property, a business or the markets, turns your home into security for that investment. If the investment falls in value, you still owe the full mortgage. The stress test and lender limits protect the lender's position, not yours.

Interest on money borrowed to earn investment income may be tax-deductible in some situations, but that depends on how the money is used and documented. Deductibility is a question for your accountant before you borrow, not after.

What the lender will look at

With a federally regulated lender, a refinance can go up to 80% of your home's appraised value. You must qualify for the new payment at the greater of your contract rate plus 2 percentage points, or 5.25%. A HELOC is a revolving line of credit secured on your home. A HELOC's revolving part is capped at 65% of value, and 80% in total with a mortgage.

For example, take a home appraised at $1,000,000 with a $500,000 mortgage. The most a federally regulated lender would lend in total is $800,000. The lending limit leaves up to $300,000 of room before penalties and costs, subject to qualifying and lender approval.

Lenders to try, in order

• Banks, credit unions and monoline lenders first: a full refinance, a HELOC or a combination.
• Alternative lenders next: an alternative lender may help if your income is harder to document, at a higher cost.
• Private money last: private money suits only a short, clearly defined bridge, such as finishing a project before an institutional refinance. We refer private bridges to Stonefield Capital, our private-lending brand.

What to do next

To see how much equity you might access, try the refinance equity tool; results are estimates only, not an offer or advice. Or use our call-me-back form to talk through your plans.