May 6, 2019

3 Financial Tips for Renovating Your Home

What could be more exciting than a home renovation? The possibilities are endless. You could fix up your kitchen and fill it with the bells and whistles you always wanted (an instant hot water tap is high on my wish list); you could lay down new hardwood flooring, finish your basement, add built-in storage in the bedrooms – the list goes on.

There’s a reason there’s an entire cable channel dedicated to home renovations. Renos are fun to watch, and it’s fun to imagine what your home could be like if you took a hammer to it. But they’re messy and time-consuming. And unless you have an entire TV crew on your side to hire expert contractors, rummage through antique shops and salvage quartz countertops from mysterious sources, renovations are expensive.

If you’re planning to renovate your home, there aren’t many ways to reduce the costs or make new money appear. But there are tools you can use to make the process of saving and paying for a renovation easier. 

There are better ways to save than your dusty old bank account

If you’re like many Canadians, you’re still using the same savings account from childhood and earning next to no interest on it. 

If you’re squirreling away thousands of dollars for a big renovation, you should at least get the most out of your savings account. The best high interest savings accounts in Canada pay close to 3% interest and let you withdraw your money at any time. Even if you want to keep your chequing account at a different bank, you can still open one of these savings accounts and enjoy the benefits.

You can also make use of your tax free savings account (TFSA) to save for your renovation tax-free.

You can get a low-interest loan using the equity in your home

There are two ways to do this.

If you’re purchasing a home and planning to renovate, many lenders will allow you to borrow extra money in your mortgage to make improvements. Some will let you take out cash; others will agree to make payments to contractors on your behalf after the work is done. To go this route, you may need to get an appraisal. You may also need to prove that the renovations will significantly increase the value of your home. 

You’ll also need to show you can afford the additional mortgage. A mortgage affordability calculator can help you determine how much you can borrow.

The much more common way of using home equity to pay for renovations is to get a home equity line of credit (HELOC). This is a type of mortgage loan that allows you to withdraw up to 65% of the value in your home when you need it. There are limitations and setup costs to HELOCs, but the interest rates are typically much lower than non-secured lines of credit (usually around prime + ½%). With a HELOC, you also have the option to make interest-only payments. And if your renovation is likely to increase the value of your home, you may be able to pay back the entire amount you owe on your HELOC when you sell your home.

A cashback credit card is your best friend

It’s a very bad idea (repeat: BAD idea) to pay for a renovation with your credit card. The interest rates are massive, and credit card debt is notoriously hard to pay down. Don’t do it. Save up using other means (or use home equity) to pay for your renovation. 

It’s a very good idea, however, to pay for your renovation with a cash back credit card, and then pay it off right away. 

Many credit cards have great introductory cashback offers. For example, the Scotiabank Momentum Visa offers 10% cashback up to $200 on your purchases for the first 3 months. And the SimplyCash Preferred Card from American Express offers 5% cashback up to $300 for the first 6 months.

If you are able to carry a few cashback credit cards, you could conceivably pay for your entire renovation with the credit card, pay if off right away with your saved money, pay no interest, and take home hundreds of dollars in cashback rewards – all for spending the money you were going to spend anyway.

This strategy works best when working with vendors who can accept credit cards, and when you take on the onus of buying materials yourself.

The best renovation is the one you can afford

A new kitchen or bathroom, shiny floors, fresh paint – it’s a great feeling to improve your space and have features you can enjoy in your home. And, they can cause a lot of stress if they cost money you don’t have. 

For your next renovation, make sure you’re using the right financial tools. Save in advance using your high interest savings account or TFSA. If you must borrow, choose a HELOC instead of financing it with your credit card. And take advantage of rewards offers by choosing the right cashback credit card for your purchases.