Canadians took on debt to fund pandemic renovations. With the interest rate hikes coming, it could get more expensive

Samantha Ritchie’s family remodeled their two daughters’ bedroom during the COVID-19 lockdown.Cole Burston / The Globe and Mail

Samantha Ritchie’s house of war in eastern Hamilton, Ontario began to feel cramped after she and her husband had children. Her two daughters shared a bedroom without a closet – a chaotic little space constantly littered with clothes.

Ms Ritchie and her family have wanted more space for some time, but spending so much time at home during COVID-19 shutdowns has pushed the problem back. “The kids who were doing distance learning were definitely a key factor,” she says. “They needed their own bedroom to have their own learning space.”

She and her husband briefly considered buying a new home, but soaring real estate prices meant they couldn’t get the amount of space they wanted in the city. Adding a second floor was also out of their budget, so they opted to empty the main floor, creating an open plan kitchen and living room, while moving their bedroom to the finished basement to allow for girls to each have their own room.

Ms. Ritchie says the work will bring in additional debt of $ 200,000, which they added to their mortgage when they renewed it in February. That more than doubles what they owe to around $ 380,000. Still, she believes the renovations will be worth it once completed.

Ms Ritchie is not the only one taking on debt to make her home more comfortable since the start of the pandemic. Home equity lines of credit (HELOC) borrowing has grown significantly over the past two years. Equifax Canada claims that the volume of new HELOCs increased by 56.7% between the second quarter of 2020 and a year later. In just one month earlier this year (between June and July), HELOC debt in Canada grew by $ 1.11 billion, to a total of $ 226.6 billion, according to Better accommodation, a data-driven housing news site.

Olayinka Brimoh, a certified financial planner and chartered investment manager in Winnipeg, says he sees two categories of upgrades: those meant to make the space more functional for those who spend more time at home, such as offices at home. residence; and those meant to make it more pleasant, such as decks, swimming pools and hot tubs – items that, before COVID-19, were not in great demand due to the time and money required to maintain them .

Mr. Brimoh says the wisdom of going into debt for a renovation depends heavily on the person’s situation. For example, if the person downsizes and wants to repair the property for sale, it is almost certain that they will be able to pay off the debt with the sale. For someone who insists on a renovation that may not add value – like a swimming pool – Mr Brimoh says he encourages them to consider staying in the house a little longer so they can enjoy the addition, because the value may not be reflected in the sale price. That said, the aspects of a home that add value also change with our changing habits, says Hamilton realtor Reisha Dass.

“I can’t tell you how many times I have buyers looking for swimming pools,” said Ms. Dass, who had a swimming pool installed at her house when she spoke to The Globe and Mail. She says that lately she will be as interested in a house for sale with a pool or hot tub as she is in a house with a modernized kitchen and bathroom – items that have by far generated the most interest. in the pre-pandemic era. Before, “when you had a house with a swimming pool, it was a niche object… Maintenance didn’t make sense to people. Now that is so desirable.

Financial planner Brimoh said he is encouraging clients to change their budgets to allow them to pay off debts more aggressively ahead of a planned rate hike.

A report from CIBC Economics published on Nov. 4, indicates that approximately $ 350 billion in mortgages will be affected by the evolution of rates in 2022. For those with variable rate mortgages, this means that less money from each payment goes to the principal, and more to interest.

Mr Brimoh says that while many are using the money accumulated over months of pandemic-inspired spending model changes, he has also seen many people borrow for such renovations – or even dip into their retirement savings. “They assume that their house is going to continue to rise in value,” he says, “but you don’t know when you are going to sell, or if there will be circumstances where you will be forced to sell your house.”

He also advises borrowers to get fixed rates now before they start to rise. That’s what Ms. Ritchie plans to do. The key to debt management, she believes, will be to keep a close eye on interest rates, so that she and her husband can convert their variable rate mortgage to a fixed rate before an expected hike.

“It was quite a percentage of difference [between] variable or fixed, ”she says, adding that even if they only keep the variable rate for a year, that’s less money spent on interest that can be applied to their principal.

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