The value-add: Help clients understand ways to finance home renovations
By Brynna Leslie
I’m sure you’ve all been there. A client asks about a renovation, you meet to discuss the options and he backs out. Have you ever considered it’s the cost that gets people down? A lot of people are intimidated by the thought of financing their renovations.
As a contractor, you can add a lot of value by offering potential clients some simple guidelines about financing. Understanding and communicating the pros and cons of each will help you develop trusting relationships and make your clients feel more comfortable when they go into talk to the bank.
1) Credit Card
“A credit card can be a good place to start,” says Evan Hickey, a Halifax-based financial planner at RBC. “If they have a points program, they can take advantage of earning points on their credit cards, then pay off their credit card right away with cash or a credit line.”
Benefits: Readily available. Clients can get a boost to their reward points.
Drawbacks: Most credit card companies charge 20 per cent interest. Clients would be advised to have alternative funds to pay off the balance right away, before interest accrues.
2) Refinancing the mortgage
This can be the best option for people looking to do large-scale renovations, including additions or major kitchen and bathroom renovations. Homeowners can borrow (mortgage) up to 80 per cent of the total value of their homes.
Benefits: Refinancing can be the cheapest option over the long-term because it includes low interest rates, long amortization periods, (which means lower monthly payments), and, at the end of the day, a single mortgage payment that covers the costs of the renos and the initial house purchase.
Drawbacks: Not much flexibility. There are also legal costs or interest charges that can come into play if a client refinances at the wrong time, says Hickey.
3) Home equity plan
Anyone with an existing mortgage can apply to have a credit line set up, using their home as collateral. To be eligible, the client must have an existing mortgage on the property. As with refinancing, one can borrow up to 80 per cent of the total value of the home — including the line of credit, primary mortgage and mortgage segments under the plan’s umbrella. The interest rate on a line of credit under a home equity plan is relatively low – usually prime, plus half a percentage point — and there’s some flexibility in how it can be used.
“With a line of credit under RBC’s Homeline Plan, as you go through the renovation, you can draw funds as you need them, so you’re not paying interest on the full amount up front,” explains Hickey at RBC.
Once a renovation is complete, clients have the option of rolling the total balance on the line of credit into a new mortgage segment. This “mini-mortgage” can be amortized over the length of the existing mortgage, which means low monthly payments and typically low interest rates.
Benefits: A line of credit within a home equity plan offers a low interest rate and gives clients repayment flexibility. Plus, there’s no minimum monthly payment required on the principle amount. That means if money is tight one month, clients can opt to just pay the interest and nothing on the principle. Once the line of credit is paid off or the balanced is transferred into a mortgage, it remains accessible to the client. This means the open line of credit be used for purchases that have nothing to do with the home, such as cars, travel or education, without renegotiating with the bank.
Drawbacks: If clients maintain a high balance on the line of credit and don’t pay off more than the monthly interest charges or start financing their lifestyles with it, it can become a never-ending debt.
4) Personal loan
“If it’s something they want to pay off in the short term, but they just need to have a lump sum, a personal loan would allow them to do this,” explains Hickey. Personal loans generally have a maximum term of five years, which means monthly payments are higher than they would be in other scenarios. Interest rates are also much higher, about three to four percentage points above most mortgage rates.
Benefits: An unsecured personal loan isn’t attached to the equity of the house and can be arranged quickly to give clients a lump sum quickly.
Drawbacks: This can be an expensive option, due to high interest rates and short loan terms.
5) Saving up
If people know in advance that they want to do a renovation, they can save toward this goal. Hickey recommends the tax free savings account (TFSA). Clients can contribute up to $5,500 per year into a TFSA without paying tax on any interest earned within the account. If they haven’t yet contributed to a TFSA in past years, they may be eligible to contribute up to $25,500 in the first year without paying tax on interest earned.
Another option, which can be more accessible and therefore flexible, is a high-interest e-savings account. But clients will pay tax on the interest.
Benefits: Saving up for a project means renovations can be done without accruing debt.
Drawbacks: People may have to wait a few years before they can afford the project.
Next time you have a client on the fence, throw a few financing ideas at him. Hearing about financing options from you may just be the thing to kick start him into action on the renovation.