When dreaming of a home renovation, visions of new cabinets, countertops and appliances are often the first things that come to mind.
But, figuring out how you’re going to pay for it? That’s likely a little further down the line.
It may not be the most exciting part of a reno, but experts say planning your financing well in advance is key to a successful project.
“Prioritizing where to spend your home improvement dollars is smart, but before you begin, you should make sure that you have a clear plan in place and access to the funds that you need to get the job done,” said Barry Gollom, vice president of Mortgages and Lending at CIBC.
With any renovation there are a certain number of costs you can calculate upfront – and then there are the unforeseen costs that can pile up, when a project goes over-budget or a contractor’s estimates don’t match the final bill.
Even without those unforeseen costs factored in, Canadians plan on spending more than $17,000 on renovations in 2015.
According to a CIBC poll released Friday, project budgets are down from almost $20,000 in 2014, but the number of people planning to reno remains high, at 42 per cent of those polled.
Buffer your budget
Whatever your project is, experts recommend planning ahead and creating a realistic budget.
“Renovations almost always cost more than what you thought they were going to cost,” said Gary Tymoschuk, VP of Operations at the Credit Counselling Society.
He recommends adding a buffer of 25 per cent to your projected budget right from the beginning. If you are on a tight budget and only want to spend $10,000, for example, an additional 25 per cent on top of that could be problematic.
TD’s Pat Giles agrees, adding that homeowners need to be realistic about potential bumps in the road changing their initial plans. “Factoring in an extra 10 to 15 per cent on top of your anticipated costs can help keep you from running over-budget,” said Giles. “Be prepared to make the trade-off decisions that inevitably come with renovations,” he added.
How to pay for a reno
The best way to pay for a renovation is to save up some, or all, of the money first, said Tymoschuk.
Of course, $17,000 is a significant amount, he added, and most won’t be able to save all of this, which is why many Canadians turn to different financing options to pay for their reno.
The worst form of financing, Tymoschuk said, is paying for your project with a credit card. “Credit cards likely have the highest interest rate,” he said. “And if you carry that balance over a period of time, you have to factor that in — those interest payments can be quite significant.”
Tymoschuk said to find the lowest possible interest rate when financing your renovation. That may be from your bank or credit union, if you’re in good standing. If there is equity in your home, you could look at refinancing your mortgage or taking out a second mortgage.
However you choose to finance your reno, you need to make sure you can afford the repayments that come with financing, stressed Tymoschuk.
“Sometimes people bite off more than they can chew, they take on too much debt, can’t afford the repayments and this gets them into trouble,” he said.
Home equity line of credit
A home equity line of credit (HELOC) is one of the most popular ways Canadians finance their renovations. They work much like regular lines of credit, allowing the homeowner to borrow whatever money they choose, up to the credit limit, pay it back and borrow it again, if needed.
Along with options like mortgage refinancing and borrowing money that you’ve prepaid on your mortgage, HELOCs have the benefit of low interest rates, according to the Financial Consumer Agency of Canada (FCAC).
According to the Bank of Montreal, rates for HELOCs usually range from prime to prime plus 0.5 per cent (compared to a regular line of credit at prime plus three or four per cent).
“The most cost-effective way, if you’re going to borrow, is to use equity in your house,” said Tony Tintinalli, BMO’s regional vice-president of personal banking.
Tintinalli said that with HELOCs, banks can usually loan larger amounts at a cheaper cost to the homeowner.
“So if you don’t have a lot of savings, but you still have a lot of equity, you can sometimes go into the six figures for that kind of line of credit versus the personal line of credit that doesn’t have that security,” he said.
He cautioned, however, that homeowners should set up a HELOC before starting the renovation. Failing to do so could restrict the kind of loan a bank is able to offer you, forcing you to take out a higher-interest personal loan or regular line of credit.
Tymoschuk also has a warning about HELOCs — the borrower must be disciplined to make sure it gets paid off. “Often they’re interest-only payments,” he said, meaning that you could keep paying the interest, but the principle never goes down.
With files from The Canadian Press