The Price of Home Renovation

You've watched every home renovation TV show and read every home makeover magazine. Now you're seriously considering renovating your home—is it worth doing?

"Homeowners tend to undertake major renovations when their existing house no longer works because of mechanical problems, aesthetic problems or a growing family," says Chartered Accountant Henry Goldbach, a Partner with Horwath Orenstein LLP in Toronto. "A major renovation makes sense if the increase in the value of the finished house – based on what you could sell it for—is at least equal to the value of the property before renovation, plus the cost of the renovation."

Renovating may also make sense if you can afford to pay in cash. "The ability to pay in cash means the renovation is a lifestyle choice that clearly fits within your income availability," says Chartered Accountant Jason Evans, a Partner with Robinson & Company LLP in Guelph. "Well-done kitchen or bathroom renovations will tend to increase the value of your home, but keep in mind that these renovations will depreciate over time."

If you don't think you can recoup the cost of your renovation, Goldbach says, "It may make more sense to sell and relocate."

If you do need to borrow, your cash flow should be enough to cover the monthly carrying costs of the loan. "For major renovations, the homeowner may want to refinance the existing mortgage," says Goldbach. "The owner should have enough monthly savings to be able to finance the additional monthly mortgage payments. This is also an excellent form of forced savings, since the principal portion of the monthly cheque goes to reduce debt."

You can also finance a renovation through a line of credit, but make sure you calculate the actual costs over time. "Homeowners shouldn't be fooled into believing that borrowing at low interest rates on their line of credit is not ‘real' money," says Evans. "Borrowing $10,000 at five per cent over 10 years will actually cost $12,720 to repay, and these funds must be repaid with after-tax dollars. Therefore, a family with an average tax rate of 35 per cent will actually need to earn almost $20,000 in employment income to repay the cost of the renovations."

If you are considering a home renovation, the first thing to do is to prepare a budget.

"A budget is critical to determining whether a renovation is affordable and fits with your overall personal financial plan," says Evans. "A budget is also important because people tend to underestimate the actual costs of renovating."

When preparing a home renovation budget, be sure to consider hidden costs. "One of the main hidden costs tends to be the cost of accommodation if you have to move out during the renovation and stay longer than expected," says Goldbach. "It's always a good idea to provide an amount in your budget for unanticipated costs or overruns."

You can also reduce the risk of going over budget if you hire a reputable contractor who has been used and recommended by someone you trust. "You should also ask the contractor for a written estimate that includes what circumstances may lead to extra costs and what process will be used to make sure you authorize any extras in advance," adds Evans.

While the cost of a home renovation is not usually deductible, there may be some tax relief available if you are renovating to use a portion of your home for business, or if you are renovating to accommodate a disability of one of the home's residents. "These tax rules are very complicated and anyone embarking on a renovation with the expectation of a tax deduction should first ask a Chartered Accountant for advice," says Evans.

Before you decide to renovate, be sure to seek professional financial advice. "A CA can help you put together a budget and determine your financial requirements," says Goldbach. "A CA can also help you determine your options for financing the renovation."



Brought to you by the Institute of Chartered Accountants of Ontario.