Lifestyle How to finance your renovations: an expensive question

Buying a house requires a lot of financial calculations. Once that’s done, it’s time to breathe and enjoy your new home… or get back to the calculations to make renovations! This is the situation in which Marylie* and her partner Mathieu* find themselves.

The situation

Marylie and Mathieu are both 33 years old and have one child. Their economic situation is enviable, and they are asking themselves a seemingly trivial question – but as we will see in this section, the option they choose could make a huge difference in their finances in the long term.

“My partner and I would like to carry out renovations in the kitchen of our South Shore house acquired in 2023,” writes Marylie, who estimates the cost of the work at $100,000.

“We are considering three scenarios and would like to have details on the best option financially speaking to finance this project,” she continues.

The first option would be to collect this sum during the renewal of the mortgage loan, scheduled for July 2026.

The second option would be to obtain a mortgage line to finance the renovations.

“The last option would be to withdraw the necessary amount from our respective TFSAs,” she writes.

At first glance, these three options may seem rather equivalent. This is far from being the case: let’s look at how this couple’s finances would fare depending on the option chosen.

Analysis

David Thibeault, financial security advisor at Finance-ô-mètre, agreed to analyze the situation.

If the money for the renovations is taken from the mortgage, you will obviously have to pay interest on the amount, which can be annoying. For example, at a rate of 4%, an amount of $100,000 financed over 25 years results in interest of approximately $58,000.

Taking money directly from the TFSA can make the renovations seem like they only cost $100,000. However, we must take into account the opportunity cost: if this sum is no longer invested in the TFSA, the interest that would have been accumulated over 25 years is lost, and we can think that the overall return would have been greater than 4%.

Two options under study

To take the reflection further, David Thibeault studied two scenarios over a period of 25 years for the couple. The line of credit option is set aside for the moment – ​​we’ll come back to it later.

First, let’s determine that the couple should be able to renew their mortgage loan in July at around 4% instead of 4.89%.

In the first scenario, he would withdraw $100,000 from the TFSA to pay for the renovations, renew his current mortgage amount at 4% while maintaining the same payment amount as at the moment, around $1,900 every two weeks. The couple could therefore pay off their mortgage in just 15 years and 5 months, then when the house was fully paid, they would be very disciplined and put this same payment into their TFSA until the end of the scenario. If we take into account a return in the range of 5% to 8%, he would end up with a TFSA worth $806,000 to $1.1 million.

In the second scenario, the couple does not touch their TFSA, but they refinance their entire mortgage plus the $100,000 of renovations over 25 years. Despite everything, he finds himself with a lower payment than at the moment, i.e. $1,625, and pays the difference ($275 every two weeks) into his TFSA. With the same return assumptions, he would end up with a TFSA worth $891,000 to $1.6 million. The difference is important. It reaches more than half a million if the yield is 8%!

Mortgage interest must be taken into account, which still costs $192,500 more in the second scenario. But since TFSA withdrawals are not taxable and the couple has a combined marginal tax rate of 53%, this additional cost “is largely offset by the non-taxable growth of the TFSA,” adds David Thibeault in his analysis.

Several mixed scenarios could be considered, but overall, the mortgage option seems to be the winning one.

“It’s not me who makes this decision, it’s them who take this risk. We are really banking on the fact that market returns will be better [que le taux du prêt hypothécaire]but financially, it holds up,” summarizes David Thibeault.

And the line of credit?

Lines of credit are double-edged products: their flexibility is both pleasant and dangerous.

Margins generally have slightly higher interest rates, and less strict repayment conditions. This may mean that we repay more quickly… or that we only pay interest for years, which can cause the debt to take on massive proportions.

In any case, even if the couple quickly repaid their line of credit, the logic explained previously applies here too. “Financially, you’d be better off putting it on a 25-year mortgage, lowering your interest rate, having the smallest payment possible and continuing to save,” says David Thibeault.

*Although the case highlighted in this section is real, the first names used are fictitious.