How to pay for home renovations when in a consumer proposal

Hi Ross, we must do some home renovations as soon as possible. Our basement is leaking and so is the roof over our garage. It’ll cost about $10,000. But we are in a joint consumer proposal, and we still owe $4,400 on that. Do you think a second mortgage is a good option for us?

SG, Pickering, Ontario.

Hi Sean, in business school we learned we must first identify all possible solutions to a problem before we could identify the right one. The first solution was always “do nothing.” That is, what if you just ignored the problem?

In your case, this is not wise – small basement leaks can lead to major renovations, and a potential mold problem.

Another solution is to “blow it all up and start all over.” In your circumstances, that would be the equivalent of selling your home, and either buy or rent something else. You rejected that for two reasons.

(1) The costs and hassle of selling are pretty high, and you would be hard pressed to get a new mortgage.

(2) Your current mortgage and tax payment are lower than it would cost to rent something equivalent.

Related articleWants to buy a new house while still in a consumer proposal

Therefore we conclude you must borrow the money to do the renovations.

If you can borrow this money from a friend or family member, that would be best – certainly the cheapest. You can give them piece of mind by registering the loan as a charge against your property.

I’ve often seen a relative tap into their own Home Equity Line of Credit to help out a family member, and lend the money out at cost – i.e. around 3.5%

A second mortgage for sure is a doable alternative – but keep in mind the lender will insist you pay off your consumer proposal at the same time. You’d probably have to borrow at least $18,000 to pay for your renovation, your consumer proposal, and the costs associated with the second mortgage.

Second mortgages typically incur four out-of-pocket expenses for the borrower:

An appraisal fee – Private lenders will always want a recent appraisal. The cost is around $300

The lender’s legal fees and expenses – Private lenders never spend any of their own money when lending – their legal bill will typically run from $1,000 to $2,000 including taxes

Lender fee – also called an administration fee sometimes – lenders charge a one time payment because they can. They’re all different. The larger the mortgage, the smaller a percentage of the loan amount is this fee.

Broker fee – unless you are dealing directly with the lender, the mortgage agent who arranges the second mortgage for you will expect to be paid a broker fee – and again, private lenders never spend any of their own money when lending – so that means you will pay this fee.

All these costs can be paid for from the proceeds of your mortgage. Still, factor these costs together with a high interest rate (10 to 14% is fairly typical) and you can understand why you should only take on this solution if it is necessary; it serves an important purpose, and there is not a cheaper alternative solution.

Sean explained there are no family members in a position to help him out, and he will most likely move forward with a second mortgage. He was being a prudent consumer. He had already spoken to a mortgage agent before calling me. He was pleased to hear my point of view meshed with hers.

 

Ross Taylor is a credit specialist and mortgage agent who blogs frequently at ASKROSS.  If you have any questions about anything financial, send him an email at info@askross.ca, he answers everyone.

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