Why You Should Worry About Reno DebtMay 12, 2018
There’s sometimes a sense of resignation among Canadians when it comes to home renovations, suggesting that a lot of people think that the work–and the cost–can’t be avoided. But the costs of many renos can lead to unmanageable debt for some families, stretching them beyond their financial means. Here’s why you should think twice about doing a home reno, even if the financing is available.
Borrowing for renos has high risks
Doing home renovations in Canada is viewed as almost a seasonal rite of passage–just turn your tv or radio on and you’ll be bombarded by commercials about doing-it-yourself this spring, and offers for financial help to “make it happen”.
Each year, many Canadians make plans to renovate their home, but only a few have the entire project cost covered beforehand. Taking on debt means taking on more risk.
Any overspending and borrowing increases the financial pressures families already feel. Months or years later, some consumers find their reno debt lagging, and they may need help to reduce their debt.
With the offers and the financial approval seemingly right at hand, it can be tempting to take out a line of credit or a home equity loan to refresh your space. But here are some startling stats that might make you think twice.
According to the Financial Consumer Agency of Canada (FCAC):
- Readvanceable mortgages account for the majority of Home Equity Lines of Credit (HELOC) given– 80 per cent of the three million HELOCs active. But readvancable mortgages are complex, and the FCAC suggests that most consumers need more information on the risks.
- 40 per cent of borrowers don’t make regular principal payments.
- 25 per cent of borrowers make only interest payments or minimum payments.
- Most borrowers don’t repay their HELOC until they sell their home.
The data the FCAC gives suggests that many borrowers either don’t feel an urgency to repay their debt (thus accumulating more interest and having longer payments), or, they don’t have the means to repay their debt as quickly as they’d like.
As a homeowner, you need to prepare for unexpected expenses such as the possibility of interest rates rising again. As HELOC have variable interest rates, borrowers will be faced with even higher payments and longer-lasting debt from their home renovations. For some families who are struggling to make ends meet, any increase in interest rates could make it impossible to reduce debt, or meet monthly expenses.
Furthermore, when you consider all the likely costs that your family is going to face in the coming years (new hobbies, school costs, uncovered medical and dental bills), taking on debt for a home renovation might not be in your family’s best interest.
Don’t throw your reno plans out
If you’re keen on a refresh, or know that a repair or renovation is necessary in the future, start saving.
Avoid all the risks of borrowing and the uncertainty of interest rates by saving now and spending later.
Plug your plan and associated costs into a goal worksheet and start chipping away at it. By this time next year, you might be in a better position to move ahead on the project. Also, by not taking on any more debt now, you have an opportunity to further reduce your current debt. Success all around!
Here is a list of provincial rebates that could come in handy as you look to renovate in the future.
No matter how tempting, reno debt is a risk to your family finances. Instead, take the time you need to save for your future reno.