We are about the embark on the most expensive holiday season of the year. Is your bank account ready for it? It better be because you have that well needed winter getaway planned we well. We do live in Saskatchewan after all, where we have to chisel snotsicles off our kid’s nose every time they come inside.
Oh and we are all outdoor enthusiasts so we need at least one ski trip, Moose Jaw Spa visit, Banff shopping spree, or Elk Ridge cabin rental as well right? So by the time April rolls around, you can just dip into the old savings account to pay for that renovation project you put off to “next year”, right? Oh no money for that? Darn. Well it’s probably time to talk about your options!
There are two big questions to ask when wanting to renovate: Who do I hire? How am I going to pay for it? We think choosing a pro is the easy part but then again we are biased, having access to Saskatoon’s best. So, lets talk about paying for it.
Does borrowing money for your renovation make sense? Our home is our biggest investment after all, right? Wrong!
I know what you are thinking. How can my banker tell me that all of the time if it’s not true? Well, I once did the same when I started my career at one of Canada’s top banks. If a house is an investment then all you need to do is keep spending money shining it up with new floors, kitchens, baths, basements etc. and you increased its value, right? Next time you are snow birding it to the US, ask a local how their biggest investment worked out. All the polishing in the world couldn’t stop their houses from being worth a little more than the present I left to the porcelain God this morning. At the end of the day, a mandatory purchase (house, car etc) is not an investment. Therefore, don’t choose to renovate on the sole principle of increasing your homes’ financial value.
There is one exception:
Basement Development for a Rental Suite
Borrow, borrow, borrow!!!! Why? Because you aren’t paying the loan payment and with under a 2% vacancy rate in Saskatoon, finding a tenant is easy. Not to mention the interest is tax deductible. As long as I know the monthly rental income will at least match the monthly expenses, my only consideration is how quickly can the financing be in place and where do I sign?
Should you still renovate even though your house is no longer an investment? Of course! Every house needs to be updated and repaired but remember, you are doing it for comfort! COMFORT! So should you borrow money for it?
Repairs should be treated as essential and are necessary evils that may require borrowing if you don’t have emergency savings. A leaky roof can do a lot more, expensive, damage if not repaired immediately. Correcting the initial problem is always cheaper. Hence when your child decided to start flushing their transformers down the toilet, nipping that behavior as soon as it started should only cost you a couple hours of Roto-Rooter and tantrums rather than a whole new plumbing system and a child who grows up to be a pyromaniac.
My financial planner once told me to spend any extra money that I would put aside for emergency savings on my HELOC (discussed below), and then use that incase of an emergency rather than having cash sitting in an account stagnant.
Whether or not to borrow for your “comfort reno” depends on two words: Cash flow. Unlike my parents’ generation, I am comfortable with debt. Healthy debt, that is! Unhealthy credit card debt that I can’t quite explain the origins of, is not good. However, if I can keep my same standard of living while borrowing a reasonable amount to make my home feel more comfortable and inviting, then why not?
If you are like 86% of Canadians then you are going to pay a portion of your reno from savings and borrow the rest (CMHC 2011). We have broken your borrowing options into 4 categories and noted some things for you to consider:
- Mortgage plus improvements: If you are buying a house that needs some remodeling, then this is definitely one of the best options available. Your renovation is financed in with your low mortgage rate, which means one simple payment at a low interest rate. However, with the current housing prices in Saskatoon, your income may have only qualified you to cover the purchase price without room for renovations.
- Home Equity Line of Credit (HELOC): Do you have some equity built up in your house? Technically the Canadian government only allows banks to provide a credit line for 65% loan to value; however, most lenders work the HELOC as a second mortgage and lend up to 80% loan to value. This secured credit line is very flexible and most lenders allow portions to be locked in at fixed rates with fixed payments. Think of a jar of coins. You can take out a handful to pay for something and lock that in and then take out another handful to buy something else and lock that in if you like as well. HELOC’s are great options for those people who have equity built up.
- Unsecured Line of Credit: This involves you walking into your bank and asking for a pocket full of cash that replenishes as you pay it off. Due to the flexibility of an unsecured line of credit, the interest rates tend to be a bit higher and you have to show available cash flow within your monthly budget. However, once it’s there, it’s there! Pay it off and use it again without the hassle of extra trips to the bank.
- Renovation Loan: A personal, unsecured loan, for a specific renovation project. There are very few Canadian companies left who offer this kind of financing, due to the increased risk. However, thanks to innovative Canadian tech start-ups, like financeit.ca, Home Improvement Pros are able to offer financing directly to their customer at very competitive rates. Typically speaking, renovation loans are credit based lending so the interest rate is relevant to the individual borrower. These private lenders are also willing to lend to a wide variety of borrowers. Kijenga and many of our pros have partnered with companies like financeit.ca to offer the convenience of financing while discussing your renovation so you don’t have to leave home in search of it. This is a great option for those who want the convenience of in-home financing, fixed monthly payment, interest rates based on their own credit score, or don’t have other financing option available.
Renovations don’t have to be stressful. In fact, we love surprising our homeowners with how fun they can be! First determine if your renovation is essential or if it’s for comfort. If your renovation is for comfort, take a look at your monthly expenses and determine if you will still have positive, comfortable, cashflow even with some healthy debt. If the answer is yes, we hope to see you soon!
If you have any questions about your potential renovation or renovation financing, fire us an email or give us a shout!