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Talking Dollars and Sense

by - Tuesday, January 13, 2009

A few weeks ago, I was interviewed by a national newspaper (more details on that when the article comes out in February). The writer was looking at how the economy has impacted spending on renovations. Turns out HandyMan and I seem to be prudent and a bit of an anomaly. When we bought our house last July, we set aside a hefty renovation budget. We chose to make a smaller down payment and take on a bigger mortgage… in exchange, we’d be able to pay for most of our renovations in cash instead of taking out a loan to pay for them. We knew we’d be making changes right away and spending that cash in the short term so taking on a longer term loan + interest didn’t seem wise. Most other folks, it seems, take on loans or borrow against their equity to make renovations. With the slowing down of the market though, the question was whether a loan (interest rates are still relatively low) was still the financing source of choice for renovations?

I’m not sure what my neighbours are doing, but HandyMan and I will continue along our conservative track. By spending only what we have, and spending it slowly (we’re doing a room by room renovation), we’ve discovered a few benefits:

  • We are able to save and contribute to the budget at the same time as we spend it
  • We can earn some interest on what’s left in the budget
  • We are better able to prioritize what we want to spend our money on and don’t feel the pressure to “do everything at once”
  • We can take the time to find good deals
As the economy continues to worsen, there’s even more reason to keep to our plan. Losing our jobs is a small but growing concern so sticking to a cash budget minimizes our risk of not being able to pay down any outstanding debts. The housing market in Toronto has also slowed considerably… while houses in my neighbourhood still sell relatively quickly it is not the same as even six months ago with multiple bids and prices way above asking. One house on my street (exact same model) sold for 32% more than the price we paid 10 months earlier! I wonder if those folks are regretting their purchase now that prices have fallen back down to earth.
I’m guessing there are many others out there who have had to reconsider their renovation plans. Has the current economic situation affected you? Are you holding back on spending or not? Or do you consider your home a long-term investment and choose to spend now and reap rewards later?

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  1. This isn't our forever home, so we're conservative on the renos that we do. We want to make it comfortable w/ afforable updates and ones that will hopefully appeal to future buyers.

    That being said, we renovate w/in our means, just like you guys, one room at a time. By the time we're done, it might be time to move out! But we prefer focusing on one project at a time.

  2. GOOD FOR YOU!!!
    I think you are going about things the right way. To many Americans overextended themselves and that is why we are in the current economic mess that we are in.

    Your bathroom is looking great.

  3. I think it is terrifying to think about having a loan that you used to update (blank) means that a 2k fix could end up 4x as much! that blasted compounding interest! I totally agree - outta pocket renos means more affordable results.

  4. Jeremy and I were able quickly gather and save enough for a 20% down payment on our home. This was primarily to avoid paying PMI. However, it means all of our renovations (which add up to about what our home down payment was) have been put on low-interest credit cards that we are paying off as quickly as possible (within the next year). This means we aren't paying as much interest on our 30 year loan when we can have all our renovations paid off within a year.

    We have already put more money into our home than what we could get out of it if we were to put it on the market today. So I guess we are looking at our home as a long term investment. Also, our priority is making our house a home for us and not considering resale value with every step we take. Also, being in Oklahoma we're not hit as hard by the economy - that makes things a little easier.

  5. We did something similar to you guys. We put aside our reno budget ahead of time since we knew the place would need a lot of work.

    Since it's not our forever home and the property market is going down we're trying to be economical with what we do. We're lucky to be physically able to do most of the work ourselves which is a real bonus.

    It's funny how many people assume we're doing it off a big line of credit though. :oP

  6. We set aside money for renovations before we even started to think about what we wanted to do. Now, we are rethinking some items to allow us to decorate and furnish the house within this budget as well instead of spending more on top of this. Since we are not planning on spending our whole lives in the house, we are making adjustments that make it more comfortable for us instead of making it our "dream home".

  7. We decided to use our Home Equity Line of Credit to fund the basement reno, and everything else we needed for the house (we're upgrading some furniture, and need to do some landscaping, for example). The debt thing is a bit of a worry, yes, but with interest rates dropping, and with the Line of Credit being secured against our house pushing the interest rates even lower, we are paying off more of the principal with each payment than we were originally (same goes with the mortgage- one of the advantages of having a floating rate!).

    We were lucky, in retrospect- we spent more money on our house, but in return got one that needed almost no work (the unfinished basement is the only reno we're going to have to do), other than minor cosmetic things, like putting in phantom screen doors. In addition, by spending the money now to finish the basement, we have increased the time we can spend in the house- not only now, with entertaining in (therefore saving money on going out), but in the future if we have a family. We have 4 bedrooms, so we can have a whole Brangelina Brood before we'd run out of space and have to move. And, if something happens and we DO have to sell the house and move, by finishing the basement, we're increasing the pool of prospective buyers.

    Our downpayment on this house was huge- over 50%, intially, so house prices would have to literally hit rock bottom before our house would be worth less than our mortgage. We are located close to schools, grocery stores, malls, public tranist and downtown (where we both work), so if we have to sell one, or both, cars we'll still be able to get around.

    So, yes, taking on debt to finish the basement is a bit of a concern. In all honesty, if we hadn't started the reno in October, before everything really hit the skids, we would probably not have started it at all. But I am confident that things are going to work out.

  8. Yes things are not good at all , the housing prices are dropping , it would be a great time to upgrade but we couldn't make enough on our home to warrant a move, although our house is upgraded and more stylish than all the others of the exact same style I don't think anyone would pay what I think it is worth to get out of it what I have put in never mind to make a profit. We would love to finish our basement and although it would be money well spent , there is no money for it , I must almost stop my improving , which will make it tough to come up with blogging content, but I will try.

  9. j&k - we're trying to find that balance between improving for resale, and improving for our own comfort too. We have a medium-ish timeline (another 4-7 years in this house) so hopefully we'd definitely be able to recoup any reno costs at the end of that. That said, most of the changes we make are comfort driven - I so could not live with all the pink carpet and floral wallpaper, lol!

  10. ms.homeowner - sounds like you've got a lot of things going for you -- great location, smaller mortgage, variable rate (yay variable! we have one too), and room for expansion. Its the folks that don't have all those things and still take on more debt that make me shudder.

  11. chris - I know your home is DEFINITELY more stylish than your neighbours' ;) But its true...its hard to realize any gains in this market for even a superior product. Maybe you just focus on prettyfying your craft room for now?

  12. I need clarification: by doing less down payment and a bigger mortgage, is it kind of the same as financing the renos with the mortgage?

    I ask because I know someone who got a larger mortgage with a "cash back" feature which was used to do a lot of immediate renos.

    So are you mainly comparing financing renos via mortgage vs. via a bank loan?

    And to answer your main question, we paid more in the beginning for a home with less work required, and are doing a few small things every year that we save up for.

  13. We bought a home that needs a lot of work - but no major renos that needed to be done right away, except the wiring. So we put aside money for that, and since then, we've saved for each small project (e.g. removing walls in the main living space, repairing crumbling plaster, having floors refinished).

    Our kitchen will need to be overhauled, but we're saving up for it - we are doing some basics and painting it for now but plan to strip it down to the studs (like yours) in 2-3years - after saving up for it! We debated this idea of spending $300 now only to spend $15K later, but we feel more comfortable paying for the reno with money we've saved, so painting will make it liveable in the short term.

    To be honest though, other than padding our emergency savings a little more, and our reno savings a little less, we haven't changed our reno plans from 8 months ago.

  14. Our renovation budget was small to begin with because I was a stay at home mom. I'm now working part-time from home, but obviously I don't have a large full-time income to add to our renovation budget.

    We chose to buy a house that did not need major renovations right away, because we knew that would be difficult with a baby/toddler. We've made some relatively inexpensive changes that have made a big difference in the house, but the bigger renovations like ripping out all of the floors and gutting the kitchen will have to wait. We are paying cash for our renovations and trying not to incur more debt.

    Initially our renovation plans were very grand, but we're trying to be realistic about the house. It's one of the smaller ones in the neighborhood, so we don't want to over-renovate and end up unable to recoup the costs.


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