How to: Finance a renovation

There's never been a better time to start upgrading your home. Housing prices are on the upswing again in many parts of the country and a number of government initiatives, from the Home Improvement Tax Credit to a range of provincial and federal energy-efficiency rebates, can help reduce the overall cost of your renovation. And of course, interest rates are still at an all-time low and expected to stay that way for at least another year.

But rebates and incentives aside, you still have to come up with the money to pay for the job. Here’s a rundown of your options and their pros and cons.

Cash
Great if you have it, especially for small projects. But if you have a substantial sum in a high-interest investment account or mutual fund, withdrawing it in order to finance a renovation may not always be in your best interest. You should measure the loss in compound interest that the money would have earned if you left it in the bank, plus any penalties for early withdrawal, against the cost of an equivalent loan. In some cases, a loan might actually be cheaper.

Credit card
There are pros and cons to financing with plastic. On the plus side, you can pay off as much or as little as you like each month without penalty (sometimes, but not always, above a nominal minimum), and if you have an existing card with a high enough credit limit, you can skip the hassle of waiting for a loan approval. It’s also a convenient way to buy what you need at retail stores and to keep track of your spending. However, there’s a price for all that convenience: interest rates are generally much higher than with other types of loans and a maxed-out credit card carries a range of problems, from a lowered credit rating to the beginning of a debilitating debt spiral. Some banks offer “secured” credit cards with lower interest rates, but for larger amounts, you still may be better off with a conventional loan or line of credit.

Bank loan
A bank loan is the most straightforward way to finance a renovation, or any item that requires a large initial outlay of cash. Fixed repayments are withdrawn from your bank account at regular intervals, such as weekly, biweekly or monthly. If your budget allows, try to arrange weekly payments. Since the repayment total equals the sum of the original loan (or “principal”) and accrued interest, over time weekly payments can reduce this amount much more quickly than a single monthly payment, without costing you a penny more.