She advises clients planning major renovations to save a sizable chunk of the money in advance. A high-interest savings account inside a TFSA can be a good place to stash your cash. “We are used to instant gratification in our society, so some people look at me in horror when I say, ‘Let’s save for that.’ They say it will take a long time and I say, ‘Yes it will. Then you’ll feel what it’s like to be without this money and that will prepare you to pay off the rest of the loan.’”
A line of credit secured against your home will give you a lower interest rate, but unless your lenders cover costs for legal fees and an appraisal, you may need to pay $700 to $1,100 to set one up. Most mortgages will allow you to take a home equity line of credit from another lender, so shop around for the best rate. According to mortgage broker Kim Gibbons, expect to pay 3.5% or more, depending on your credit history.
If you get a line of credit, make sure you have the cash flow to make the payments and cover your other financial obligations, and give yourself a deadline to pay it off. Lenders will usually extend credit if your monthly obligations are less than 40% of your gross income, says mortgage broker Robert McLister, but you’ll want to stay below that number to protect yourself against rising interest rates.
If you can’t pay off the debt promptly, you might be better off refinancing your mortgage. “You’re often wiser to get a one-to five-year locked-in mortgage below 3%,” says McLister. “That way you can save interest up front, shield yourself from some variable-rate risk, and pay off lump sums whenever you want, subject to your lender’s prepayment privileges.” If you currently have a fixed-rate mortgage, find out if you would need to pay penalties for breaking it early.
The reno may not add to your home’s resale value. On a recent episode of Income Property, host Scott McGillivray tells beaming homeowners Jerry and Amee that after putting $55,000 of work into their basement suite, the home that they bought just weeks before just increased in value by $84,000. (Costs on this reno are broken out in “Warning: May Not Be Exactly as Shown”) Homeowners like to justify pricey projects by tossing around numbers like this, but you need to be careful. The truth is, for a kitchen or bathroom reno, you can expect to recoup about two-thirds of your cost. (For more payback estimates, see “Is Your Reno Really an Investment?”)
And if you choose the wrong renovation project or make unpopular design choices, you may get no return on your investment, or even reduce the value of your home. “A $12,000-porcelain sink for your bathroom will be beautiful in that high-end Rosedale home, but it’s a really stupid thing to put into a one-bedroom condo because it won’t be appreciated,” says Vancouver-area realtor Sarah Daniels. “By the same token, if you put a $20,000 kitchen in $2.5-million home, you might as well just burn the money. If it’s not up to the quality expected in the neighbourhood, don’t do it.” Also remember your new kitchen won’t be considered new unless you sell in the next couple years, meaning it may have no impact on the amount buyers are willing to pay.
If you’re concerned about resale value, shy away from ornate designs, bright colours and overly personalized renovation projects. “Pick something relatively neutral for your countertops and cabinetry, and then use bright colours and accents in paint,” says Daniels. “If you like bold colour choices, you can change the paint before you sell.”