How to budget for renovations as more decide to stay in their homes

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When speaking to someone who has undergone any type of home renovation, the word “stress” usually comes up, which makes sense given the cost and time people put into these projects.

But the home renovation boom still continues as many choose to stay in their homes rather than risk the roller coaster ride that the current Canadian housing market represents. Advisors are also having more planning discussions with their clients about how to pay for these changes — especially in the face of inflation and rising interest rates.

Christopher Thiessen, senior portfolio manager and senior wealth advisor at BMO Nesbitt Burns Inc. in Winnipeg, says client questions about home renovations have been “fairly constant” over the past several years.

“When we talk to our clients or recruit a new client, the question that inevitably arises is what are the major expenses they will have in the foreseeable future, because the sooner we know about it, the sooner we can plan for it or make the right financial decision” , says Thiessen.

He adds that when a client says they want to renovate, it’s an automatic “alarm bell” to ask some more in-depth questions.

“You have to ask: Do you have cash now? How is your money invested and whether it is cash [and accessible]? Or is some form of funding required to ensure the renovation can take place?”

The next step, says Mr. Thiessen, is to “stress test” a client’s budget by getting them to solicit their bids from contractors. This would help set a realistic timeline for the work and ensure they actually have the funds to pay for what they want.

“Customers also need an emergency plan in case the renovation takes longer, costs more or there are surprises,” says Thiessen.

“The numbers are the numbers and that can’t be changed, but asking deeper questions and finding out if the client has the means to actually make that happen is a discussion consultants need to have.”

Identify the difference between wanting and needing

Likewise, the difference between want and need is an issue that must be raised at the beginning of any home renovation discussion with clients, says Todd McLay, portfolio manager at Habourfront Wealth Management Inc. in Saskatoon.

“It still fascinates me that people continue to spend money that they don’t have,” he says.

“You think you need that bathroom or kitchen makeover or whatever, but just a little patience goes a long way and gets you on the right side of things [and] builds the muscles of what real saving looks like.”

Mr McLay also advises clients on where to keep the money they have set aside for renovations and says the tax-free savings account is a good choice as it is safe, liquid and tax-free money that clients can access access whenever you need it.

“Use something that will runny and still give you a small yield,” he says. “Whether it’s a private debt pool or something like that, that’s not affected by interest rates or inflation or anything like that.”

The other idea that several consultants have mentioned as a way to finance renovations is a home equity line of credit, which is a secured form of credit that uses the appraised value of the home as collateral.

Scott Evans, a financial advisor and certified financial planner (CFP) at BlueShore Financial Credit Union in Vancouver, says he regularly advises clients about this financial product because it allows them to create a line of credit by paying off their mortgage.

“I would always recommend having a home equity line [of credit] for everyone. It doesn’t cost anything to have and it can serve multiple purposes,” he says, adding that it can also act as an emergency fund for unexpected renovations like a leaky roof or a broken sewer line.

“I tell my clients it’s going to be something that’s collateralized with their home that they’re borrowing against and often gives them flexible repayment options where they can pay interest only or pay back quickly if they want to.”

The idea of ​​converting renovations into a mortgage is one Andrea Andersen, financial advisor and CFP at Edward Jones in Calgary, has heard a lot about, but warns clients against as it could significantly increase the cost of the renovation.

“I have clients who say, ‘It’s only going to increase my mortgage payments by $200 a month.’ Well, that $200 adds up over a 25-year mortgage,” she explains.

“Now that interest rates are doing what they’re doing, that $50,000 home renovation could suddenly cost itself double if the customer pays it off over the life of their mortgage, so I make sure to show them that reality.”

Ms. Andersen acknowledges that renovations come unexpectedly, sometimes due to extreme weather events or disability. In these cases, she speaks to clients about insurance policies they should have in place to cover these potential future costs, or in the case of disability costs such as a ramp installation, about available government grants that may be able to help.

But at the end of the day, clients need to be made aware of whether or not they can afford their potential home renovations and how that might affect their financial plan.

Does today’s home renovation affect tomorrow’s retirement plans? You have to find out, says Ms. Andersen.

“I tell my clients that you need to be prepared and plan for all of these things — ask yourself if this is a want or a need — and have you taken the time to consider what the true costs are,” she says . “Because there’s only one bucket of money.”

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