Loan or Line of Credit?

Renovation spending has taken a permanent lead over new construction according to the Canada Mortgage and Housing Corporation (CMHC) Renovation Market Outlook for 1997-1998. Spending is expected to grow to $23.4 billion in 1998, a 6.7 per cent increase over 1997.

CMHC also found that in the first two years of ownership, buyers of resale homes spend over 50 per cent more on renovations and repairs than do either buyers of newly built homes or owners who don't move.

If a homeowner decides to renovate, the first step in financing the project is determining how much it will cost. Homeowners should include a contingency to allow for unexpected expenses. Most people use savings to pay for renovations however, others may need to investigate their financing options.

"When financing is needed for a home renovation, homeowners should get information about a loan and a line of credit,'' advises Bob Tillmann, Vice-President of Secured and Term Lending, Canada Trust. "Understanding the difference between the two will help people choose the option that best meets their needs.''

A line of credit is a cash reserve that a person can use at their own discretion.

People can use as much or as little of their available credit as they choose. For example, a customer may be pre-approved for a $25,000 line of credit but may only use $15,000 for a home renovation. Interest would only be charged on the $15,000.

Lines of credit can be secured or unsecured and can usually be accessed through cheques, telephone banking, credit cards, automatic banking machines or at branches. As long as you are within your limit and payments are up-to-date, a line of credit can be used over and over again.

"A line of credit is a flexible financing option. You have instant access to funds when you need them and you only pay interest on the funds that you use,'' advises Tillmann. "A line of credit gives you complete control over your own spending decisions.''

A loan is a one-time advance of a specific amount of money with a fixed payment schedule.

"A loan is designed for people who want to borrow a specific amount of money to meet a one-time need and pay it back over a designated time-frame. Because you choose the number of months or years during which you want to pay back the loan, you know exactly what your regular payments will be which can help with household budgeting,'' said Tillmann. "However, you may choose to pay off part or all of your loan at any time without penalty.''

"If you are looking for financing for a home renovation or another major purchase, it is important to speak to a financial adviser to determine whether a loan or a line of credit is the best choice for you,'' Tillmann advises. "A financial adviser can help you develop a manageable financing plan that meets your overall financial needs.''

For more infromation on this subject go the Canadian Home Builders Association.

Canada Trust