Using your home equity line of credit for renovations?

With a constant stream of housing design channels to provide inspiration and low interest rates making it easier to borrow money, more and more Canadians are tackling home renovation projects. Although home renovations can often increase the value of your home, you are putting that investment at risk if you accumulate too debt in the process.

home equity line of credit

According to a recent CIBC Home Renovation Poll:

  • 48 per cent of Canadians intend to renovate this year, which marks a rise from 37 per cent the previous year
  • The most common projects are basic maintenance (48 per cent), landscaping (38 per cent) and bathroom projects (31 per cent)
  • The majority of people will use cash or savings to pay for their home renovations, but a quarter of respondents will take on debt instead

“While home renovations fall under the “good debt” category because they present the opportunity to increase the value of your home, if you are taking out debt, the interest charges will cut into that return on your investment,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.

“A home equity line of credit is a common tool for homeowners to leverage during home renovations. However, don’t forget that in doing so, you are reducing how much of your home you own and increasing how much you owe. Only turn to your home equity line of credit or other debt as a last resort and make sure that you have a plan in place to pay it off swiftly,” says Schwartz.

Here are some tips to avoid accumulating debt during your home renovations.

Remember interest rates

Your home equity line of credit typically offers lower interest rates than some other debt tools, but don’t forget that it is vulnerable to rising interest rates. It is revolving credit, meaning that the payments are variable, based on interest rates. Rates have risen recently and are likely to do so again in the coming months. When deciding to take on debt, anticipate that your payments will increase beyond what you anticipate now.

Set a project plan

The best way to avoid overshooting your costs is to establish a hard budget before you even talk to a contractor. Make very sure to have a contingency fund in your budget, so that you don’t end up having to accumulate more debt to cover costs.

Map out a realistic timeline as well, which can help you keep your budget on track.

Don’t take on too much at once

To reduce the need for debt, why not space projects out so that you’ve got the cash flow to cover costs? It is tempting once hammers are swinging to want to get everything done at once, but the extra interest charges you’ll incur by spending beyond your means are a good reason to be patient and plan.

Ways to reduce costs

What sort of renovation projects are you planning on? Some projects qualify for home renovation tax credits. It’s worth investigating before you begin.

Another effective way to reduce costs is to roll up your sleeves and DIY whenever and wherever you can. A major cost centre when it comes to home renovations is labour, so if you can take on small jobs, like clean-up or painting, you’ll spend less to get the same outcome.

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