End of tax credits guts reno budgets

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For Barbara Mathews and her husband, Bruce, home renovations help keep the love alive.

"It's the glue to our marriage to rip down walls," says Ms. Mathews, 51, who has made more than $150,000 worth of renovations on her 1919 Toronto home, with more to come.

The couple, both teachers and artists, do much of the labour themselves, and are in the process of gutting their third floor to create a master bedroom with an office, studio and walk-in closet. Last year, they took advantage of the Home Renovation Tax Credit when they had their windows replaced.

"Our house is our really big investment and we also live in it. We can enjoy it and we always like to make our homes more energy-efficient, more beautiful, more comfortable, and then when we sell it, hopefully we'll make more money as well. So it's not just about what we can save through the government incentive."

For some Canadians, however, the end of the Home Renovation Tax Credit and the elimination of the Energy-Efficient Home Improvement Tax Credit have dealt a blow to their renovation plans.

A new Harris/Decima survey commissioned by Bank of Montreal reports 32 per cent of Canadian homeowners say they can either no longer afford to renovate or have had to delay their renovations due to the tax credits being eliminated. One in four respondents said they are moving forward with renovations as planned.

Laura Parsons, area manager of specialized sales for BMO, says despite the finite timetable for the home renovation credits, a lot of Canadians, herself included, were surprised that the government did not extend the credits to further stimulate the economy. "We all expected the government to 'new and improve' it, much like they did with the first-time home buyer's program, because it had such a great influence."

Once people get past their disappointment over the tax credits, however, Ms. Parsons believes they will reconsider their renovation plans.

"For me, I'm thinking of renovating and I don't care about the tax credit, I'm going to renovate," says Ms. Parsons, 50, who, along with her husband, works out of her Calgary home. She is planning to refinish her wood floors, repaint, buy new appliances and maybe even add a hot tub this year. "I wake up to it every day, so I want it the way I want it."

Some things to take into account, she says, are how much value a renovation will add to your home, whether it will make your home more sellable and whether you can afford it. Financial planners and mortgage experts can help answer those questions, she says, but in general, homeowners get the biggest returns from investing in kitchen and bathroom renovations. Online renovation guides are a great resource for determining the potential return from a renovation.

Another consideration is urgency, says Steven Stewart, a 47-year-old computer programmer who unexpectedly had to replace his furnace when it broke down last year. While he was glad to be able to take advantage of both the renovation and energy-efficiency tax credits for his 20-year-old house in Brampton, Ont., he says certain home improvement decisions should not be based on tax credits.

Laurie Campbell, 46, executive director of Credit Canada, says it's not surprising that a third of Canadian homeowners are rethinking renovations. More telling, she says, is the number of survey respondents - 30 per cent - who said they did not have an emergency fund to cover unexpected home repairs. Ms. Campbell says that figure is probably low, with many Canadians counting their line of credit, or even their credit card, as their emergency fund. For those without a cash buffer, the loss of tax credits may have them reconsidering what needs to be done around the house.

"Did it impede them from moving forward with the renovations? I think, for sure, for some people, yes," she says. "You generally spend a lot more than you think when you're doing renovations, and tax credits have a ceiling, so they may have found themselves spending more than they had wanted to spend in the first place - a very precarious situation."

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When considering the affordability of a renovation, the bottom line is that it should add value to your home and it should be something you can pay back within a reasonable period of time, Ms. Campbell says. "Reasonable depends on whether you want to sell your home, what type of a mortgage you have on it now, whether you can incorporate that into your mortgage, are you putting any of this on credit card, which is never a good idea, or whether you've got a fairly low-interest line of credit."

As a general rule, no more than 15 per cent of your net income should go to unsecured debt each month, Ms. Campbell says.

For her own renovations on her 105-year-old Toronto house, Ms. Campbell started by researching how much the improvements would enhance the home's resale value. She then financed it by increasing her mortgage to cover the $130,000 cost, but paid off the mortgage within 10 years.

"When it comes to determining the affordability of a reno, it all depends on what you have. If you have $100,000 to blow and you don't really care, you just want to have a nice house, then it is quite obviously affordable if you have that money in cash in pocket. But when you're looking at borrowing to do this type of thing, again, you have to look at the impact and the type of debt and credit that you're using, and the length of time it's going to take you to repay it and also the value it's going to add to your home. If you're taking out $50,000 to do something that's not going to add any value to your home, it's a mistake."

Things to consider when budgeting for a renovation:

• Understand how a renovation will affect the value of your home.

• Know which renovations create increased value and are popular selling features. For example, kitchens and bathrooms are common renovations that often increase the market value of a home, making them attractive rooms to focus renovations on.

• Think long term when making financial decisions about your home.

• Be financially prepared for the unexpected, such as a leaky roof or a broken pipe.

• Get renovation quotes in writing and understand what guarantees they provide. For example, if the plumbing in your renovation includes more work than expected, will the quote go up?