Should You Borrow Money Now For A Renovation?

Home renovations can be an exciting endeavor, transforming your living space into the dream home you’ve always envisioned.  And home renovations can feel daunting, especially in today’s environment where interest rates are currently higher than we’ve seen in 15 years.

We were recently speaking with a homeowner who was looking to do a $100,000 renovation project on their home.  Their mortgage was due for renewal, and they could refinance and borrow at a fixed rate of 5.75%.  Alternatively, they could arrange a line-of-credit, with a variable rate of 7.2%.

Their other option was to save up the money to finance the renovation.  Saving would be a great way to avoid paying $6,000 or $7,000 in interest costs.

The dilemma: What to do?  Borrow?  Wait and save?

Saving for a renovation is a great way to pay for the project.  After the project is done, no more payments.

Saving for a project works well when all things are equal and nothing else changes.  The issue with savings becomes when the cost of the product is increasing faster than your ability to save for it.  We’ve seen this with people trying to save money to buy a home, when home prices are increasing faster than their ability to save for a downpayment.

And in the past few years, we’re seeing it in the increase in construction costs.  Inflation has been raging in the economy over the past few years, and nowhere more so than in the construction industry.

Inflation in construction has generally been greater than the overall inflation rate.   Following are figures are for residential construction, Greater Toronto Area (source: Statistics Canada)

2017 – 6.6%

2018 – 5.6%

2019 – 1.6%

2020 – 7.6%

2021 – 25.7%

2022 – 22.0%

2023 (6 months) – 7.1%


Why have construction costs increased?

One of the reasons construction costs are increasing is that building codes have been changing when it comes to energy efficiency and safety.  More stringent building codes are generally good.  For example, better insulated homes will reduce heating and cooling costs and reduce carbon emissions.

Some of the increase in cost has come from the materials homeowner are choosing for their homes.  That wide plank hardwood floor that is so popular today is more costly to install than the 3-inch wide hardwood flooring that was the standard for many years.

In Toronto, which has the highest rate of construction inflation in the country, two factors are leading to increasing costs.  One is exceptionally high demand due to population  growth.  And secondly, traffic and parking issues are contributing to project cost.  It takes longer than every to travel to a jobsite, and as street parking is disappearing, and contractors have to pay for parking spots, with that cost is passed on to homeowners.

But for the most part, construction costs are increasing because the cost of materials and labour are increasing.


… back to saving vs borrowing

Saving for your renovation project is a great strategy when the cost of construction is stable, and there is a minimal change in construction cost.

But when the cost of the project is increasing faster than ability to save, or is adding on more cost than the cost of interest, borrowing to complete the project might make more sense.


Here’s the math on borrowing all the money for a $100K project:

$100,000 + interest of 5.75% = $105,750 in a year.

$100,000 + construction inflation of 6% = $106,000 in a year.

If construction inflation is less than 6%, saving and waiting might be the better option.  If construction inflation continues to rage, borrowing and building now might save money in the long term.

Should you borrow to do a project now?  That depends on a lot of factors – debt load, ability to handle increased payments, job stability, etc.


Are construction costs going to continue to increase? 

Historically, construction cost has been increasing faster than the rate of inflation, and there is no indication this will change in the near future.  With the number of people moving to the Toronto area and the government’s desire to increase the number of homes that are built  every year, there will be increased pressure on the labour market, even if material costs remain the same.  And with building codes continuing to focus on increasing energy efficiency, there will be increased cost pressures from code changes.