Why Your Debt Load Needs To Be In Home Renovation PlansMay 12, 2018
The sun is shining, the flowers are blooming, and you’re about to start home renovations, but did you remember to think about the impact it may have on your debt load? The difference between paying with credit versus your own money or a home renovation is over $7,000, according to our Home Renovation poll from last year. That alone is a major reason why you need to consider your debt load in your home renovation plans.
Home equity lines of credit (HELOC) have been on the rise and are often used to pay for home renovations. HELOC’s tend to have lower interest rates than an unsecured line of credit as they are tied to the Bank of Canada’s interest rate, which was raised twice in 2017 and experts predict it will be raised again this year.
Borrowers are also carrying extremely large debt loads on their HELOC with average outstanding balances being roughly $70,000. That could mean new or additional strain on your personal finances if you’re not prepared for an interest rate hike.
HELOC’s are actually becoming a debt problem that is getting some significant attention in the media. What can you do to make sure your debt load isn’t impacted by a home renovation?
Stress test your mortgage and your debt before planning any significant home renovations.
Understanding how your finances might be impacted by an interest rate hike, can give you peace-of-mind in your ability to adapt should it happen. It can also help you identify if you should be paying off debt before moving ahead with renovations, so you are not pushed into becoming #HousePoor by an impulsive home renovation.
Play around with mortgage calculators and online debt calculators to see how much your payments might change with a rise in interest.
Determine if the home renovation is a want or a need.
Sometimes the desire to renovate can be driven by the fear of missing out (FOMO) and people may turn to credit to make it happen regardless of the consequences. Taking a moment to think about why you are doing a home renovation can be a sobering but important process, especially if you plan to take on new debt.
Sometimes this reflection on whether it is a want or a need can affect how you choose to go about things such as deciding to focus on paying off debt first, then plan a home reno.
Build a complete budget for the home renovation.
Scott’s Reno to Reveal is a great site that offers lots of financial resources when it comes to home renovations; along with helpful home renovation advice. Completing a renovation can often come with hidden expenses you may not think about and if you haven’t budgeted properly it can lead to taking on debt. Having a float in your budget of 15-25 per cent can provide a safety net for unexpected costs that may come up during a renovation.
Tackle your current debt load.
Saving for a home renovation can be challenging when dealing with bills and debt payments; especially with cost-of-living continuously on the rise. If a review of your finances sheds light on the challenge of paying off your debt even before a home renovation, exploring debt relief options may be beneficial. A consolidation loan can be an effective way to streamline your debt into a single payment and may reduce the amount you are paying to debts each month. This may allow you to start saving for that home renovation, while still focusing on paying off your debt.
The first place to start would be looking into whether consolidation is a good option for you. Here are some blogs that will help you understand consumer debt consolidation further:
- Consumer Credit Proposals and 3 Other Ways To Get Out of Debt
- Has Canada’s Economy Affected Your Ability To Reduce Debt?
- 8 Helpful Financial Literacy Blogs For Struggling Gen Xers
You don’t need to let debt stand in your way of completing home renovations, but before taking on new debt to complete them make sure you understand the potential impact it may have on your finances. Do your research before taking on any home renovations and be mindful of the debt load you currently have.