Tips for financing a home renovation this Spring

Spring is in the air. The snow has melted, the trees (finally) have leaves again, flowers are blooming. And what better way to enjoy it all than to finally build that new deck you’ve been talking about?

While you’re at it, the kitchen sure could use a face-lift.

And the bathrooms… you’ve been meaning to change out those ugly old tiles for new ones.

Suddenly, before you know it, the renovation bug that comes out each spring has bit and you’re thinking of doing some major work around the house.

But renovations are expensive, and money doesn’t grow on trees. Fortunately, there are lots of options available to homeowners to pay for the renovations your house needs (and the ones you want, too).

If at all possible, save in advance for your renovation project. If you can, spend this spring cleaning and polishing (you’ll be amazed at what some elbow grease and fresh paint can do for your space), and plan to take a hammer to it next year. Not only will that leave you with 12 months to save in advance, it will also give you a chance to think carefully about your renovation plans and keep an eye open for sales on items you’ll need.

For home renovations, there are two savings tools that work particularly well.

The first is a high interest savings account. Unlike the regular savings account at your bank that probably pays next-to-no interest, a high interest savings account pays in the neighbourhood of 2.3% interest and allows you to withdraw your money at any time.

The second is a tax free savings account (TFSA) which, despite the name, can be used as a container for all sorts of investments. The advantage of using a TFSA is that you don’t have to pay tax on your investment income, and you can take out your money without penalty at any time.

Even though there’s a program in place that allows you to use your RRSP to buy your first home, it’s not recommended to withdraw money from your RRSP to fund a renovation. You won’t get the contribution room back and you’ll pay expensive tax on the withdrawals. Leave your retirement fund alone and consider other choices for home improvements.

If your project absolutely has to happen this spring, you should consider financing your renovation with a home equity line of credit (HELOC). A HELOC allows you to borrow money against the equity in your home for significantly lower interest rates than you can get with an unsecured line of credit or a credit card. The best HELOC rates in Canada are typically around Prime plus ½% (that’s 3.95% for now), and you can borrow up to 65% of the value of your home, as long as your equity doesn’t dip below 20%. HELOCs work like a line of credit so you can withdraw only the money you need and pay it back at any time.

Another advantage of a HELOC is that the minimum monthly payment is interest only. That means that you’ll only have to pay $3.29 a month for every $1,000 you borrow. This can certainly make HELOCs an attractive option but remember you do have to pay back the principal eventually. Plan to make regular repayments over and above the minimum and borrow only what you can afford.

The downside of HELOCs is that they can be quite expensive to set up. Depending on your first mortgage, you may have to use a real estate lawyer to conduct the transaction and pay for fees like an appraisal, which could easily push your setup costs over $1,000.

To navigate a HELOC application, we recommend talking to a mortgage broker who can help you look at all of the options available and make the best decision based on your needs.

Depending on where you live, you might be able to get grants or rebates for making improvements to your home, especially ones that will help cut down on energy use. Programs may be available for replacing windows, upgrading toilets, installing smart thermostats, and even replacing aging gas appliances.

Occasionally, manufacturers and dealers will also offer incentives on certain products. Keep an eye open for sales (this is where waiting a year can come in handy) and watch for deals on big ticket items. Even small discounts can go a long way when you’re spending thousands of dollars.

Credit cards aren’t known for their favourable interest rates and easy repayments schedules, so you might be thinking that it’s a little weird they’re mentioned here. However, there are times when using a credit card makes sense for your home renovation projects.

One such time is when you can use a store credit card that lets you defer payments on items like appliances and building materials interest-free.

You can also take advantage of cashback credit cards that reward you for making the purchases you were going to make anyway. Introductory offers can pay up to 10% cashback on some spending categories. Even if the card has a high annual fee, your net reward could be high enough to justify it and leave you with a little extra cash after your renovation. If you choose to go this route, though, make sure to pay your credit card off in full before accruing any interest.

A renovation can be a big expense, and no marble back-splash is worth taking on debt you can’t afford. Think carefully about your renovation and look at all the options to save – whether it be saving money in advance or saving on the work to be done. These tools can make it easier but at the end of the day it’s still your own money that you’re investing. Make wise choices so that you can enjoy your home for years to come without putting stress on your finances.