Debt and Home Renovations: Here’s What You Need To ConsiderMay 23, 2018
Before purchasing paint supplies, researching home contractors, flipping through design magazines to get a feel for the latest trends and styles, it’s important to be completely prepared before heading into a home renovation, and that means checking in on your finances as well before doing so. As we discussed in our recent podcast, there should also be some prep work involved in deciding whether it’s really a good time to renovate. Here are a few things that Canadians should add to their to-do list, including checking in with their debt, in order to determine whether a renovation really makes sense:
Consider your renovation costs
Before you start renovating, it’s a good idea to figure out whether you can really afford the potential costs of your reno project. Remember, renovation costs are not always what they seem. In fact, there are often unexpected surprises or delays that can increase the overall cost of your renovation. To be safe, it’s recommended you add about 25 per cent to your home renovation budget to avoid unplanned bills and expenses.
As mentioned in our podcast episode, if you’re using your Home Equity Line of Credit (HELOC), you need to consider whether the interest rate increases that are predicted to occur sometime before the end of 2018 could also affect your ability to comfortably manage your repayment costs after your reno.
Think about your mortgage
HELOC is not the only loan that may be affected by the predicted interest rate increase. Depending on the type of mortgage you have, an interest rate rise could also increase your monthly mortgage payments. If this is the case, would you be able to comfortably manage this payment in addition to your home renovation debts as well as your other financial responsibilities? Ask yourself this question before saying yes to a renovation.
Get to really know your debt
Another essential item on your to-do list before you renovate is getting in touch with your debt. Make a list of all the debts you owe, the interest rates currently attached to each loan, the time it will take you to repay them and the amount of interest you could potentially pay in the end. You can use this debt calculator to help you figure out how long it will take you to pay back a loan and how much interest you will end up paying.
As mentioned in our podcast, it’s also a good idea to be proactive and future-proof your debt. Although you may be managing your consumer debt now, you might find it a little more difficult to continue to reduce your debt if increased interest rates results in higher a mortgage payment.
Check in with your other financial goals and priorities
Is reducing your debt a priority? What about saving for an emergency or your retirement? Don’t forget to check in with your other priorities. If you find that a renovation overshadows your other goals, it may be a good idea to wait until you can focus on a renovation in addition to the other important financial priorities in your life.