How to renovate your home on a fixed income

But just because you're on a tight budget doesn't mean you're stuck in your old style and dysfunctional structure. There are options, even for those who can't access the extra income. Let's explore what is possible.

Why traditional mortgages and HELOCs may not be the answer

For many people, the first thought when looking at financing a home improvement is a traditional loan or home equity line of credit (HELOC). But for seniors living on a fixed income, this may not be a viable option. Why? Simply put, qualifying for a new mortgage or HELOC usually requires a strong, stable income. If your income is limited to the Canada Pension Plan (CPP), Old Age Security (OAC) and Guaranteed Income Supplement (GIS), qualifying for a new loan can be difficult.

Now, what about seniors who set up a HELOC before retirement? If that's you, you might think you're in the clear. However, it is important to weigh the pros and cons of using a HELOC for home improvement. On the other hand, a HELOC allows you to borrow against your home equity, and you usually pay interest on the amount you use. This can make it a flexible option if you plan to do the repair in stages. On the other hand, because HELOCs have variable interest rates, your monthly payment may increase over time. And with a limited income, even a small increase can hit your budget hard.

Exploring other home improvement financing options

If traditional mortgages or HELOCs aren't in the cards, don't worry—there are other ways to finance those much-needed home improvements. Here's a breakdown of the alternatives:

1. Withdrawal of investments

If you've built up some savings in stocks, bonds or other investments, cashing out a portion may be an option. This method allows you to avoid taking on debt altogether, which is a big plus. However, it is important to consider the long-term impact on your financial security. Selling an investment too soon can reduce your future income and potential growth. Also, depending on how your investment is structured, you may face tax consequences. If you have money in a tax-free savings account (TFSA), you may want to consider using that to reduce your tax bill. Always consult a financial advisor before making any major decisions.

2. Reverse mortgage

A reverse mortgage allows homeowners age 55 and older to turn part of their home equity into cash, which can be used to finance renovations. You don't have to pay off the loan as long as you live in your home, making it a great option when your cash flow is tight. However, reverse mortgages can be complicated and come with fees. In addition, the loan balance increases over time, which means less equity that you can transfer to your loved ones or pay for your long-term care. However, for seniors who want to stay in their homes as long as possible, this can be a useful tool.

3. Personal line of credit

Another option to consider is a personal line of credit, which works like a HELOC but isn't tied to your home equity. You can borrow a certain amount of money, repay and borrow again as needed. The biggest advantage here is flexibility. But as with any type of credit, it's important to keep an eye on the interest rate, which can vary depending on your credit score. (Because there's no collateral, the rate will always be higher than a HELOC and your credit limit will likely be lower.) It's also important to avoid borrowing more than you can afford, as this can lead to financial problems down the road.

4. Private mortgage

If you are lucky enough to have family or friends with the money to borrow, a private loan can be another way to finance your renovation. With a private mortgage, someone you trust lends you the money and you agree on payment terms. This option may be more flexible and personal than dealing with a bank or lender, but it is also important to formalize the agreement to avoid misunderstandings or family disagreements. As with any financial agreement, make sure both parties are clear about the terms and conditions.