Home Renovations

Fred: Welcome to the Scotiabank “Find the Money” podcasts. I’m Fred Ketchen, Director of Stock Trading for ScotiaMcLeod. These monthly podcasts call on some of Scotiabank’s most knowledgeable experts to help you make the most of your money. Here we’ll discuss strategies designed to put you in the financial driver’s seat.

In this podcast we’ll be discussing home renovations… what things you should think about if you’re considering a renovation and how you might finance your renovations, large or small. Joining us is Ray Baldelli, he’s the Vice-President, Retail Loans at Scotiabank.

Ray, the real estate market has been active and by all accounts will remain so through 2007. If people aren’t buying or selling real estate, they seem to be renovating their homes to one degree or another. When your circumstances, maybe your needs or perhaps your wants change, is it better to buy a new home or is it better to stay in the one that you’re in?

Ray: Well that’s a really common question, Fred. Everyone’s situation is unique, and for most people a home is a really important investment… and so are the renovations that you make to it. If you’re looking for a fresh new look, but you don’t want to uproot your whole family, and you want to avoid those sales commissions, land transfer taxes or moving expenses just to name a few, then renovating might be the perfect solution. It’s not just for those who are thinking of moving, but also for those who actually do move. Customizing a home to their taste might really make that home more livable and put their stamp on it. You might have found that some of your friends have moved into new homes or existing homes, and found that the decor was just not to their liking. Say that orange shag carpet that’s been around a long time…

Fred: I had one of those one time…

Ray: You did?

Fred: I did…

Ray: Yeah, well it might have lost its groove and have to go. And it’s not just there… I mean think of kitchens. Have you ever sat in a kitchen and thought, what were they thinking when they designed this? And it’s not just tastes or needs, but also necessities. Renovating is changing your windows, changing or replacing your shingles, or upgrading your furnace to improve your air quality.

Fred: So I guess the answer then Ray, is to renovate. What do people need to consider or understand before they start a renovation job?

Ray: Well I think they have to look for the right reasons to renovate. Are there any major repairs expected in the future? Those should probably be at the front of the line. Is your family growing and is space at a minimum? How about the look and feel of your house? Does it inside or outside need some updating? Those are all things to consider. And if you’ve got a whole bunch of things to accomplish in a given period of time, I think you’ve got to prioritize your list based on importance. Also review building codes or municipal by-laws in the early stages of the planning of your renovation to make sure that you’re not off-side.

Fred: So like most other things I guess, planning is the key.

Ray: Exactly, Fred.

Fred: Now tell me, how should someone evaluate the decision to renovate? Typically renovations add value to a home, are there certain projects that provide a better return on the renovation investment than others?

Ray: Well yes there are, Fred. But don’t automatically assume that a renovation results in an increase in the value of your home. Consider some statistics from the Appraisal Institute of Canada; the top 3 renovation projects that provide you a return on your investment are interior decorating at 73%, kitchen renovations at 72%, or bathrooms at 68%. That effectively means that that’s the amount on average that you might get back if you were to invest a certain amount of money. Lower on the scale would be basements renovations at approximately 49% payback on your investment, or furnace and heating upgrades at 48%. But it’s not just about that too… some upgrades or renovations will lower your energy costs and improve your energy efficiency. They might also make your home a safer place which may result in lower insurance costs. So it’s not just about re-sale value, it’s about making your home a more enjoyable and safer, healthier place for you and your family to live.

Fred: And while it may cost some money in order to make those renovations, and you don’t look as though from what you’ve said you get all that money back on the sale of the home, still, you have to live in the house and you’ve got to enjoy what it is that you’re living with.

Ray: Exactly.

Fred: So if you’ve decided which projects to do based on either a specific need or a desire to add value to your home for future sale, then what else should people consider?

Ray: Well obviously cost is a major consideration or constraint, and you want to check for or receive quotes from several contractors. But it’s not just about the lowest cost. I mean you want to feel very comfortable that this contractor will achieve the renovation result that you want, and meet all of your needs. So you might want to discuss it with family and friends, you might want to check the Better Business Bureau, those are a few sources you could use. But how are you going to finance these costs, I think is another consideration.

Fred: Well, I suppose a loan is one of the most common methods to finance a renovation, am I correct?

Ray: There’s a variety of ways. You know, for smaller renovations like painting or interior decorating, say less than $5,000, a credit card might be sufficient. But for larger renovations, say bathrooms or kitchens that cost anywhere from $10,000 to $20,000, a more flexible line of credit might be the best alternative for you. A line of credit with Visa access and purchase insurance might really help out, and with that convenience of a credit card at either the retailer or with your contractor.

Fred: And what about those big renos, you know the pool, the addition to the house, upgrades that you really hadn’t thought of before that are going to cost more than you might have anticipated?

Ray: Well those renovations, say the ones that are greater than $20,000… a line of credit is a great solution for you because it permits you to draw the amounts you need as you need it. It also allows you to re-pay without any penalties. But if you want greater control and consistency in your monthly payment, then you might consider re-financing into a mortgage for one larger monthly mortgage payment.

Fred: I think that’s a good point… how do you ensure that you’re getting the lowest rate possible when you borrow for your renovations, or any larger purchase for that matter?

Ray: Well, you want to lower your borrowing costs as much as you can. I think a great alternative is using the equity in your home. So if you’ve paid down on your mortgage, or your home has appreciated in value, then I think you might have the ability to extract some of the equity in your home to finance your renovation. We call it a home-equity line of credit, or HELOC. But at Scotiabank we call it STEP, the Scotia Total Equity Plan. It permits you to lower your borrowing costs at secured rates of interest.

Fred: So then for a larger renovation you suggest a home-equity line of credit?

Ray: Actually, all the borrowing options are all available in Scotia’s home equity plan. Regardless of the size of the renovation, you can use the equity in your home to get greater control over your finances… because you’ve got leverage.

Fred: So really what you’re telling me is you’ve got to know the renovator, you’ve got to know the by-laws, and you’ve also got to know your bankers… because they’re very important people when it comes to this kind of a project.

Ray: Yes they are. Your banker is someone who can assess your situation to get you the best financing solution for your needs.

Fred: Great advice Ray. And thanks for explaining the different options that are available for our listeners when it comes to financing their home renovations. And thank you too for listening.

I’m Fred Ketchen join us for a new podcast next month and for more information, please visit your local Scotiabank branch. We’d love to have the opportunity to talk with you.