At some point as a homeowner, you have to do renovations. Figuring out how to pay for the job requires a bit of forethought -- mostly to determine what is the best debt option. Much of the decision comes down to the financial return you want, as well as your overall capacity to manage that liability.
Why Do You Want to Renovate?
Updating your home can increase its resale value. Your real estate agent can help determine your cost to return ratio on renovations - that is, how much you net from a sale versus your project costs. If a quick and profitable sale is likely, you may have more tolerance for higher-interest debt. You can manage that extra expense because you plan to pay off the debt right away.
Of course, that comes with risk. The market can always turn without notice. Then you'll be left with a "For Sale" sign languishing in your front yard and debt that still requires repayment.
On the other hand, you may plan to stay in your home. There's no prospect of a quick profit. You might have to prepare for long-term debt. In that case, you may want to look at what are the most affordable options.
Credit Card or Loan?
A personal loan may or may not require collateral. But it may be a sound option if you are prepared to pay off the debt in a series of installments over time. Many personal loans may be paid off early without penalty. If you have a good relationship with your bank, you may be able to secure a favourable interest rate.
Interest rates may be high on a credit card. But if you plan to pay off the debt quickly, you might be willing to incur higher interest than you would with a loan - and if you think you'll get cash back rewards from using your credit card. That's especially true if you anticipate getting a return on your renovations that amounts to more than what you spent.
If you are not diligent with your credit card payments, you may end up paying interest on interest as your balance carries over from month to month. That can spell financial trouble for many, but for others, it may be their only option. After all, if you plan to live in your home and you have a leaky basement, you may not be able to put off the project for long.
Other Borrowing Options
Although many people think of a credit card or loan to finance renos, neither one may be optimal. There are other ways you can pay for your project. You can get a Home Equity Line of Credit (HELOC), which is secured against the value of your home. An unsecured line of credit is another option. You don't have to use this credit for renos, and you only pay for the amount of credit you use.
If you don't want any debt at all, you can consider using personal savings. That won't cost you anything in interest and won't increase your debt to income ratio. But if it leaves you with few savings or no emergency fund, you may want to leave your cash where it is.
Check Out Renovation Finance Options
If you want to learn more about the latest personal finance products, Rates.ca can help. There are easy tools to compare options for home improvement financing, including credit cards and home insurance. Have a look at your choices, before you get on the phone with your contractor.
