Factor financing costs into your home renovation project

It’s summer and homeowners across the country are spending billions of dollars renovating and improving their living spaces.

As anyone who has done one recently will know, renovations — anything from a bathroom or kitchen to a total remake of their home – can be expensive. Some figures indicate Canadians could spend as much as $71 billion on renovations this year.

A recent poll by BDO found that many Canadians are making financial sacrifices to complete renovations this summer.

On average, Canadian homeowners plan to spend $16,439 on their home renovations. Forty three 43 per cent who renovate will use at least some debt to pay for it which will take an average of 2.5 years to pay off.

As a result, nearly one quarter of renovators say they are not paying down debt as fast as they should, 25 per cent aren’t saving enough for emergencies, and 21 per cent are not saving enough for retirement as they focus on renovating their homes.

According to the report 44 per cent of Canadians say they would dip into their savings to cover extra renovation costs and 15 per cent would take on more debt. Forty two per cent say they haven’t set a renovation budget but plan to.

“I can tell you through conversations with clients that many people are renovating due to the high cost of moving — simply factoring in real estate transaction costs and in Toronto transfer costs can be significant financial deterrents to finding a new home,” says Jonathan Rivard, a financial adviser with Edward Jones.

There are a number of ways homeowners can pay for their renovations.

One is simply to put the charges on your credit card. However, the costs of the renovation could escalate even higher given the high interest rates credit card companies charge on unpaid balances.

Another option is to dip into your cash savings or into such things as the Tax Free Savings Account or take out a Home Equity Line of Credit (HELOC).\

A HELOC allows you to borrow against the equity in your home at a lower interest rate than a traditional line of credit. Essentially, it’s the amount of ownership of a property you have built up through both appreciation as well as reductions in the mortgage principle made through your mortgage payments. So, as you pay off your mortgage and build equity in your home, a HELOC gives you the ability to re-borrow a portion of these funds.

People should consider how they are going to finance a renovation, determine what the actual cost will be if they are using credit cards and/or a HELOC and also consider whether the cost of the renovation is keeping them from paying down debt and/or saving for retirement.

“People should think about the renovation cost as well as the interest costs,” Rivard says. “A $10,000 bathroom reno financed with debt may end up costing $15,000 if you are paying for it over a long time. “

Anytime you are considering a large financial transaction you might want to talk to an adviser you trust who can give you feedback and analyze how it impacts your personal financial situation.

“An adviser can give your guidance and ensure you consider unintended consequences of biting off more than you can financially chew,” says Rivard. “I would advise people not to indebt themselves simply because interest rates are low and they want to make changes to their home. Personal debt in Canada, which remains elevated and significantly higher than historical standards due to low interest rates, needs to be paid back and might have to be at much higher interest rates in the future.”

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

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