Much as we enjoy our homes, it seems we’re bombarded with suggestions on how to change it all up. Whether its magazine glossies, home reno TV shows or seemingly endless social media posts, it’s hard not to cave-in to the allure of making things bigger, more comfy, trendier, or just plain different.
It can be especially tempting if you have a home equity line of credit (HELOC
) available to fund those dreams. Freed from annoying financial constraints, you can focus on making the vision in your mind today your lifestyle tomorrow.
But be careful, as there’s another tomorrow after that, meaning that eventually you have to pay up. It’s not inevitably bad, but let’s take a closer financial view.
The emotional benefit laid bare: Lifestyle lift
Before descending into the finances, let’s accept that by building the equity in your home, you have put yourself in the position to make these changes. After years living and reflecting on your space, you know what best suits you, and what will suit you even better in future. With the benefit of some unbiased professional advice on the options you’re considering, you’re ready to make it happen.
Have a building budget and a construction timeline
Whether you are doing the work yourself or engaging a contractor, make sure you have a budget and a timeline. With a contractor, well ... have a contract. Clearly outline the repercussions if the terms are not met, and think practically about if and how you will enforce them (or why bother?). An unbudgeted project runs the risk of ballooning up to whatever is available, so do your homework ahead of time.
The purpose of borrowing money determines the tax treatment
When you paid down your home mortgage, neither the interest nor the principal repayment was tax-deductible. In the case of a HELOC, if the advanced funds are used for an income earning purpose, the interest can be deductible. In this case where you are using that cash to pay for personal living expenses, the interest is once again not deductible. Repayment of the HELOC principal isn’t deductible at all.
Financial planning and repayment timeline for your HELOC
Interest may be historically low, but a HELOC is usually a floating rate debt, meaning the rate will rise if and when interest rates rise generally. As both interest and principal are non-deductible for personal purposes, you will have to earn money, pay income tax on it, then make your payments. Laying emotions aside, the best first step to a home improvement is to know how much you can afford out of your weekly paycheque to pay off any loan. That gives you the cap on your budget, and the practical project limits.
Living versus investing
A common comment you will hear, perhaps out of your own lips, is that home improvement is an investment. While it is true that some renovations may add to property value, unless you are about to sell, it’s mainly a lifestyle decision. Be ready to literally live with and within the project you undertake, so you can enjoy the results for years to come, and put the costs behind you sooner still.
Learn about borrowing