Today’s question comes straight from our community and I’ll be discussing the best way to fund your renovations!
“My question is around re-mortgaging for renovations. Besides my mortgage I live debt free. I have a healthy amount of savings that I placed on my mortgage to bring down interest. If my renovation is to cost $50-$70k, am I better off using the savings I placed on my mortgage, or extending the loan to cover all or part of the renovation cost? The renovation will of course add value to the home. How does one begin to work this out?”
First of all, a huge well done on staying debt free and building up your savings!!
Now, let me answer your question with a question (or 4).
Question # 1: Can you afford the extra debt?
Not factoring in the savings you have contributed to temporarily reduce the balance, let’s assume your existing mortgage is $500k. If you applied to refinance, would the bank approve a loan of $570k?And more to the point, regardless of what the bank is willing to lend you, if your savings were gone (meaning you owe the full $570k) and interest rates went up, could your lifestyle afford the new repayments?
Question # 2: Do you have enough equity to borrow more?
Although you expect the renovation to increase the value of your home, if you apply to refinance, in most cases the bank will value your home in its current condition. So, if you were to borrow an extra $70k, would that still leave you with 20% equity? If not, the cost of your renovation is set to increase as you will need to pay Lender’s Mortgage Insurance (and remember, that is a fee you never get back!).
Question # 3: Do you plan to turn your home into an investment property some day?
The way in which you fund the renovation can impact how much interest you can claim as a tax deduction once you rent the place out.
What I mean by this is that whether you borrow the money now, or use your savings first and then refinance, can make a difference to the tax man.
So my best advice here is that if you think you might rent it out at some stage, talk to your accountant first before you decide on how to pay for it.
Question # 4 : What happens in an emergency?
Perhaps the most important question of all : if you pay for the renovations with your savings, will you have enough money left for a rainy day? Don’t assume that you’ll be able to get a loan to tide you over if you happen to get seriously ill or lose your job.
I hope that has helped give you some clarity around what to consider when making your decision. Good luck!
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