Practical solutions to help finance that reno project
A renovation can make good financial sense, says Patricia Teramoto, a branch manager with Meridian Credit Union in Burlington.
If you plan to stay in your home rather than selling and moving, a renovation can help you “create your dream home within your existing walls,” saving the cost of buying a new home and moving into it, she says.
“On the flip side, updating your home can make it attractive to buyers if you are planning to sell – especially when you focus on kitchens and bathrooms.”
But home renovations don’t come cheap. According to a 2015 report by home design platform houzz.com, the average remodel of a large kitchen in Canada costs $34,500, while a large bathroom remodel rang in at about $11,000. Here are some more options that can help you pay for that much-yearned-for reno:
Save it up
Ideally, Teramoto says, homeowners would save for a renovation in advance. If that’s your goal, she suggests setting up a high-interest, no-fees savings account that doesn’t require a minimum balance.
Label it “the reno fund” and feed money into it automatically every month or when you get bonuses or monetary gifts.
“The benefit of a high-interest savings account is that you earn interest on every dollar sitting in that bank account and the funds are available immediately, so you have access whenever you need it,” Teramoto says. “It’s not locked in the way that a guaranteed investment certificate (GIC) would be.”
Get out the plastic
About 26 per cent of homeowners polled by houzz.com in 2015 used a credit card to pay for renovations.
And there are some advantages to that, according to Teramoto, in that it helps you keep track of spending and you may be able to collect points to use toward travel and other purchases.
The caveat: “You have to pay your credit card off each month, because you don’t want to be paying 19-per-cent interest,” she says.
Raid your RRSPs
“We would never advise that you access your RRSPs to finance a renovation,” Teramoto says. “If someone asks about that, we would direct them to speak to their accountant because that can have serious tax implications when you file your tax return the following year.”
The unsecured line of credit
For a quick and dirty reno – perhaps worth $20,000 or less – a personal line of credit can be a good tool, Teramoto says.
The key benefits: there are no fees to set up the loan and you can draw on the money as you need it – you’re only going to pay interest on what you borrow. Depending on the financial institution, minimum payments may be a combination of interest and principal or interest only.
On the downside, you won’t get the best interest rate – on average, it might be 6.5 per cent. Teramoto sums it up: “It’s ideal for small projects you want to get done and pay off as quickly as possible.”
Use your home as collateral
Planning to do a larger reno, either on a home you own or one you’re in the midst of purchasing? You might consider a Home Equity Line of Credit (HELOC), basically a revolving line of credit secured by the equity in your home (the value minus the mortgage cost).
The main advantages? You get the best possible rate – generally prime plus 0.5 per cent, so about 3.5 per cent right now. You can also draw on the funds as needed and repay as much as you want at any point in time with no penalty. “The minimum payment is interest-only monthly,” Teramoto says.
Finally, because the HELOC is a multi-use collateral charge on the property, it remains in place for as long as you own the home, so you have access to cash in future – whether for another reno, a car purchase or even a vacation.
The down side: the setup cost can set you back anywhere from $700 to $2,500 (for legal and administrative fees and a home appraisal). But feel free to try to negotiate some of those fees away, particularly admin costs.
Get a construction mortgage
“If you’re doing a massive renovation on an existing home or building a home, we recommend a construction mortgage,” Teramoto says. With Meridian, you can finance up to 80 per cent of the value of the finished home, but the money is issued in stages – otherwise known as “draws” – as the project is completed.
During the construction phase, you make interest-only payments, but “when the final stage is completed, that loan gets flipped over into a mortgage,” Teramoto says. At that point, you can pick your own term, from one to five years, and an amortization period of up to 30 years.
The pros: an interest rate as low as 2.84 per cent, charged only on the current balance borrowed. The cons: you must fund the first 10 to 20 per cent of the project yourself; you’re on the hook for cost overruns and unforeseen expenses; and you’ll pay an application fee and other fees throughout the construction process.
Edited on 22 September 2017