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Talking to anyone that has undergone any kind of home renovation, the word “stress” usually makes its way into the conversation, which makes sense when one considers the cost and time people put into these projects.
But the boom for home renovations is still raging on as many are choosing to stay in their homes instead of risking the rollercoaster ride that’s the current Canadian housing market. Advisors are also having more planning chats with their clients on how to pay for these changes – especially in light of inflation and rising interest rates.
Christopher Thiessen, senior portfolio manager and senior wealth advisor at BMO Nesbitt Burns Inc. in Winnipeg, says the questions from clients about home renovations has “been pretty consistent” over the past few years.
“When we’re going through that process of speaking with our clients or onboarding a new client, inevitably the questions come up about what are any major expenditures you’re going to have in the foreseeable future, because the sooner we know about that, the sooner we can plan for it or make the proper financial decision,” Mr. Thiessen says.
He adds that when a client says they want to renovate it’s an automatic “alarm bell” to start asking some deeper questions.
“You need to ask: Do they have cash now? How is their money invested and if it’s as cash [and accessible]? Or is there some sort of financing needed to make sure that renovation can happen?”
The next move, Mr. Thiessen says, is to “stress test” a client’s budget by getting them to get their quotes from contractors lined up. This would help set a realistic timeline for the work and ensure they actually have the funds to pay for what they want.
“Clients also need to have a contingency plan in case the renovations take longer, cost more, or there are surprises along the way,” Mr. Thiessen says.
“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 this a reality is a discussion advisors need to have.”
Determining the difference between want and need
In the same vein, the difference between want and need is a topic that has to happen at the beginning of any home renovation discussion with clients, says Todd McLay, portfolio manager at Habourfront Wealth Management Inc. in Saskatoon.
“It’s still fascinating to me that people will continue to spend money they don’t have,” he says.
“You think you need the bathroom or kitchen reno or whatever, but just a little bit of patience goes a long way and puts you on the right side of things [and] builds the muscles of what true savings are like.”
Mr. McLay also advises clients about where to keep the money they’ve set aside for renovations, saying that the tax-free savings account is a great choice as it’s secure, liquid, tax-free money that clients can access whenever they need it.
“Use something that’s going to be liquid that can still give you a little bit of a yield,” he says. “Whether it be a private debt pool or something to that effect, that’s not going to be affected by interest rates or inflation or anything like that.”
The other idea several advisors mentioned as a means 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, financial advisor and certified financial planner (CFP) at BlueShore Financial Credit Union in Vancouver, says he advises this financial product to clients regularly as it allows them to create a line of credit by paying down their mortgage.
“I would always recommend having a home equity line [of credit] for anybody. It doesn’t cost anything to have it and it can serve multiple purposes,” he says, adding that it can also function as an emergency fund for those unexpected renovations like a leaking roof or broken sewer line.
“I tell my clients that it’s going to be something that’s going to be secured against their home that they borrow against and often gives them flexible repayment options in which they can pay interest only or pay it down quickly if they like.”
The idea of rolling renovations into a mortgage is one that Andrea Andersen, financial advisor and CFP with Edward Jones in Calgary, says she has heard a lot, but she cautions clients about doing this as it could increase the cost of the renovation significantly.
“I have clients who say ‘It’s only going to increase my mortgage payments by $200 a month.’ Well that $200 is going to add up over a 25-year mortgage,” she explains.
“Now with interest rates doing what they’re doing, all of a sudden that $50,000 renovation could end up costing double if the client pays it off over the life of their mortgage, so I make sure I show them that reality.”
Ms. Andersen acknowledges there are renovations that do come up unexpectedly, sometimes due to extreme weather events or disability needs. In these cases, she talks to clients about insurance policies to have in place to cover these potential future costs, or in the case of disability costs, such as a ramp installation, she’ll talk about government grants available 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 it might impact their financial plan.
Does this home renovation today impact retirement planning tomorrow? They need to find out, Ms. Andersen says.
“I tell my clients that you have to be prepared and planning for all of these things – asking yourself if this is a want or need – and have you spent the time looking at what the real cost is,” she says. “Because there is only one bucket of money.”
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