What You Need to Know: How to Avoid Reno Debt BluesMay 23, 2018
There’s a saying among Canadians — Canada has two seasons, winter, and construction. That construction season extends to home renos, too, with many Canadian homeowners making reno plans for their homes when spring finally arrives. In this podcast, we discuss four things you should know about your personal finances before you take on that reno.
Here, let’s talk about how interest rates affect your financial security.
Borrowing for a reno will increase your debt load
Many would-be-renovators don’t have enough money saved to pay for their reno with cash in full. That means they intend to borrow to make their reno a reality.
And there’s often a lot of lenders who are eager to help you make your reno happen. But with interest rate increases and lagging household consumer debt, borrowing more could mean carrying a higher debt load for longer.
Interest rates threaten financial security
The interest rates that have occurred recently haven’t been without warning, and many analysts and financial experts expect more to come in the next two years.
Lines of credit, and Home Equity Lines of Credit (HELOC) in particular, are popular routes to financing home renovations. But these loans are impacted by interest rate increases.
Recently, the Financial Consumer Agency of Canada (FCAC) warned Canadians about the risks of taking on a HELOC. The FCAC explains that:
- 25 per cent of borrowers only make interest payments, or minimum payments on their HELOC
- 40 per cent of borrowers don’t make regular principal payments
- Most borrowers don’t repay their HELOC until they sell their home
If you’re stretched thin, and unable to make more than minimum payments or interest only payments, you could find your debt load increase over the years.
As interest rates continue to climb, so too will your overall debt, and the amount you end up paying for your reno could skyrocket by the time you actually pay it off.
Cash is king
The risk of taking on more consumer debt has serious consequences for many Canadian households. When it comes to home renos, saving to pay with cash rather than taking on debt is best.
Here’s some quick and honest advice from the blog Moolala on planning for financial goals rather than taking on debt.
With more potential interest rate hikes on the horizon, now is the time to be frugal and cautious. Avoid taking on more debt and plan to pay for your home reno in cash. You might have to put off your project until next year, but you’ll avoid years of debt.
What else should homeowners know before they embark on a renovation? Find out by listening to our Home Renovation Spending podcast.