Budgeting · 8 min read
HELOC, refinance, or cash: how to pay for a renovation
HELOC vs refinance vs cash for a Canadian renovation: OSFI 65% cap, IRD penalties, and when borrowing is the expensive way to keep the kitchen.
Most people pick a way to pay after they have already fallen in love with a quote. That is backwards. The quote tells you what the work might cost. How you pay tells you what the work will still be costing in five years.
This is planning information, not mortgage, tax, or financial advice. Lenders and credit unions set their own products. Ask yours for a payout statement and a HELOC limit in writing before you treat any number here as yours.
The three options are not equally flexible
Cash is the cleanest. You spend what you have, you keep the interest, and the project cannot outrun a credit line you never opened. The trap is raiding the emergency fund to make the kitchen happen. A furnace that dies in January does not care that the quartz looks good.
A HELOC is a revolving line secured against the house. You draw as invoices arrive and you pay interest on the balance, not on the unused limit. The Financial Consumer Agency of Canada notes that most HELOC rates are variable and move with the lender's prime rate, which itself tends to move when the Bank of Canada does. You can usually pay it down without a prepayment penalty. That flexibility is the point, and it is also how a $40,000 kitchen is still sitting on the house a decade later if you only ever make the interest-only minimum.
A refinance replaces your current mortgage with a larger one and you take the difference in cash. The rate can be fixed. The payment is a schedule, not a suggestion. You are borrowing the whole amount on day one, including money you will not spend until month four.
The OSFI caps most people skip
Federally regulated lenders follow OSFI Guideline B-20. The revolving HELOC portion is expected to stay at or under 65 percent of the property's value. Uninsured borrowing as a whole, mortgage plus HELOC, is capped at 80 percent. The band between 65 and 80 has to amortize. You cannot treat that extra equity as a second credit line you refill.
A cash-out refinance is the 80 percent product. It is not insured the way a high-ratio purchase can be. You will be stress-tested on the new amount, at the greater of 5.25 percent or the contract rate plus two percent, which is the current qualifying-rate rule rather than a number we made up. If the kitchen only works if you scrape past those tests, the kitchen is too big.
Credit unions are provincially regulated and can look different. Do not assume a B-20 fact sheet is your credit union's policy.
The IRD is why refinance quotes lie until you have a payout statement
If you break a closed mortgage mid-term, there is a prepayment charge. On a closed variable, that is usually three months' interest. On a closed fixed, it is usually the greater of three months' interest and the interest rate differential. FCAC's own worked example puts the IRD well above the three-month figure when rates have fallen since you signed. Bank IRD calculators exist for a reason: the number is ugly enough that guessing it from a blog is how people refinance into a worse deal.
Legal fees, an appraisal, a discharge fee, and title insurance still show up even when the penalty is small. Treat a couple of thousand dollars of closing costs as real until the lawyer's statement says otherwise. If you are within a year of renewal, waiting is often cheaper than paying the penalty to start the kitchen this fall.
A $40,000 kitchen, three ways
Use this only as a shape, not as your approval. The payment calculator on this site defaults to $40,000 at 6.9 percent over ten years, which is a planning rate, not an offer. Change the rate to whatever your lender actually quoted.
- Cash: $40,000 leaves the account. Interest cost is zero. You still need a 15 percent contingency sitting somewhere that is not this $40,000, and an emergency fund that is not this $40,000 either.
- HELOC: you might draw $8,000 in month one and $40,000 only once the cabinets land. Interest starts on what you drew. Prime moves, so the payment in month eight is allowed to be different from month one.
- Refinance: you take $40,000 on closing, pay interest on $40,000 from day one, and you may also have paid an IRD to get there. The payment is predictable. The unused cash will find a way into a better tap if you leave it in the chequing account.
When borrowing is the wrong tool
If the project only closes because you spent the contingency in week two, you did not have a financing plan. You had a hope. Cut the scope, phase the bathroom to next year, or wait. Interest on a HELOC does not make a thin budget thicker.
Two exceptions are worth naming so they do not swallow the rule. Adding a legal secondary suite has a CMHC-insured refinance product with its own occupancy and value tests; that is a different job, and it lives in the secondary-suite guide. Energy work in some cities can sit on a municipal loan that is not a HELOC. Neither of those is a reason to finance a cosmetic kitchen you can wait a year for.
What to take to the lender
- A scope and a planning range for the work, with contingency held separately.
- The current mortgage balance, rate, term end date, and a payout statement if you are even considering a refinance.
- A current value you did not invent: an appraisal, or at least a conversation with the lender about how they will value the house.
- How you will pay the line down after the last invoice. Interest-only with no end date is not a plan.