How to Finance Your Renovation Without Breaking Your Mortgage
(Six-minute read time)
Planning a major home renovation but dreading the thought of breaking your mortgage or cashing out your hard-earned investments? In this article, we will explore how you can utilize investment-based lending to access the necessary funds without disrupting your financial stability or long-term investment goals.
In the end, we will also provide an FAQ and downloadable PDF that you can use to help you make the most of your investments.
What Is a Line of Credit?
A line of credit (LOC) is a loan that allows you to borrow funds up to a predetermined limit. You can access the funds at any time, repay what you owe, and borrow again, making it a convenient option for various financial needs.
Lines of credit can either be secured or unsecured:
A secured line of credit is guaranteed by assets you own, such as investments, your home equity, or permanent life insurance.
An unsecured line of credit is not tied to an asset you own, such as a credit card, and comes with higher interest rates since it is riskier for lenders.
What Does It Mean to Leverage Investments for a Line of Credit?
Leveraging investments for a line of credit means using the value of your investments as collateral to secure a loan. This allows you to borrow money based on the value of your investment portfolio without selling the investments. Typically, a percentage of the investment's value is used as the loan limit. This approach enables you to keep your investments growing while accessing the cash you need.
Benefits of Using Your Investments for a Line of Credit
Preserve Investment Growth: Keep your investments intact, allowing them to continue growing and earning returns.
Tax Efficiency: Avoid triggering taxes that would occur if you sold investments to access cash.
Access to Funds: Easily access the funds you need without disrupting your long-term financial plan.
Flexible Financing: Enjoy the flexibility to borrow and repay funds as needed, without the need for a new loan application each time.
Lower Interest Rates: Benefit from potentially lower interest rates compared to unsecured loans.
No Impact on Mortgage: Obtain the funds you need without breaking your mortgage or incurring associated penalties.
No Immediate Repayments: Some lines of credit allow you to add interest to the balance, reducing the pressure of immediate repayments.
Wealth Preservation During Renovation
Meet Hannah and Carlos, a young couple looking to improve cash flow while they grow their family. They bought their first home together two years ago, valued at $900,000. They are also both earning good salaries and have great credit scores, but with their first baby on the way and parental leaves affecting their incomes, they’re looking for ways to help keep cash flow steady while they conduct an $80,000 renovation of their home next year.
Their Assets:
Non-registered investments valued at $200,000
Home equity valued at $75,000
Term life insurance policy at $75,000 with no cash value
Their Options:
Use their non-registered portfolio as collateral for a line of credit. This will allow them to access up to $100,000 (50% loan-to-value) on their non-registered portfolio. The interest rate would be 6.95%.
Open up a personal loan of $80,000 with an interest rate of 9.5%.
Use their home equity as security. However, this option would not provide enough to fund their renovation since they have not accumulated enough equity to cover their costs.
Convert their term life insurance to whole life insurance to accumulate a cash value and secure a line of credit. However, this option will not fit within their renovation timeline since it would take time for their policy to build cash value.
Their Outcome:
After meeting with their financial advisor, Hannah and Carlos set up a line of credit using their non-registered investments (Option 1). By doing so, they now have available access to $100,000 in capital, more than enough to meet the anticipated $80,000 cost of their renovations.
Interest on the line of credit is 6.95%, or $6,950 annually. This is significantly lower than if they choose to get a personal loan, which would add up to $9,500 annually. By choosing to use their non-registered portfolio as collateral for a line of credit, they have more than enough cash flow they need to support their renovation project, and they save $2,550 each year in potential payments.
By leveraging their investments to secure a line of credit, they also avoid tax implications that could erode that capital. Additionally, their non-registered investments are performing well. By not liquidating them, Hannah and Carlos can keep these investments intact so they can continue to grow.
In the end, Hannah and Carlos renovated their home using their investments for a line of credit, thereby increasing the value of their property and providing more space for their growing family while their non-registered investments continued to grow.
Line of credit is subject to credit approval. Consult with your financial advisor to see if this option is right for you.
Additional Reasons You Might Want Access to Credit:
Renovating your home to include a rental unit
Assist your family financially, such as medical expenses or wedding expenses
Easy access to emergency funds
Retirement income
Fund your new business
Debt consolidation
First Steps Towards a Line of Credit Using Your Investments
Here are some of the first steps you should take to maximize your investment’s capabilities using a secured line of credit:
Assess Your Financial Needs: Determine the amount you need to borrow and the purpose of the loan, for example, home renovation.
Identify Eligible Investments: Not all investments are eligible. Typically, stocks, bonds, and mutual funds can be used, but it depends on the financial institution’s policies.
Talk to Your Financial Advisor: Discuss your options with your financial advisor to ensure this strategy aligns with your overall financial goals and to understand the implications of using your investments as collateral. Your financial advisor can also help you with the application process and required documentation.
Understand the Terms: Understanding interest rates, repayment terms, and any associated fees is crucial. Also, find out if there could be potential impact on your credit score and financial obligations.
Prepare Necessary Documents: Investment account statements, identification, proof of income, and any other required documentation may be required for the application process.
Make the Most of Your Investment’s Capabilities
By leveraging your investments for a line of credit, you can fund your projects without sacrificing the growth potential of your assets or incurring costly penalties. Download our free guide to learn more about the documents you need and the steps to take to leverage your investments for a line of credit.
For more information regarding how you can use your investments for a line of credit, book a call with us today.
FAQ About Investment-Based Lending
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A line of credit (LOC) is a flexible loan that lets you borrow up to a set limit, repay it, and borrow again as needed.
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Secured Line of Credit: Backed by assets like investments or home equity, usually with lower interest rates.
Unsecured Line of Credit: Not tied to any asset, typically with higher interest rates due to increased lender risk.
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You can use your investment portfolio as collateral to secure a loan, allowing you to borrow against its value without selling the investments.
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Benefits include preserve investment growth, avoid triggering taxes, easily access funds, lower interest rates, no mortgage impact, and flexible repayment options.
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Market volatility can affect borrowing limits, accruing interest can increase your debt, non-repayment can impact your credit score.
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An Insured Retirement Program (IRP) Line of Credit lets you borrow using your life insurance policy as collateral.
To learn more, visit: Life Insurance for Retirement: Discovering the Insured Retirement Program (IRP)
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A Home Equity Line of Credit (HELOC) is a secured line of credit that allows you to borrow against your home's equity with potentially lower interest rates.
To learn more, visit: 4 Reasons Why You Should Get a Home Equity Line of Credit (HELOC) Before Retirement
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