How your house just got more expensive
Yes your house is getting more expensive. Your house is going to cost you a lot more money in total to pay for. You bought your house as an investment; as your retirement savings however, it is costing you a lot more money. Here is how your house just got more expensive:
Interest rates are on the rise
Both in Canada and the United States prime rate has increased, already multiple times within the last year. Prime has been at its lowest historical rate for years but is now on the rise as shown in the nice graph on ratehub.ca. If you have a fixed rate mortgage, upon renewal of your mortgage your interest rate will surely increase. If you have a variable rate mortgage your rate already rose and you now paying more interest on your mortgage.
Interest rates will continue to rise
Interest rates will continue to rise as the economy grows and inflation increases. Inflation (the increase in costs of goods we buy like groceries) increases as the price of goods increase. If we are feeling good about the future and have more money to spend we are willing to pay more for goods. This causes inflation and if it increases too quickly governments will raise interest rates to force us to save instead. With higher interest rates we earn more on our savings accounts, and other fixed income products like GICs.
Using your home equity line of credit is more expensive
Home equity lines of credit (“HELOC”) are lines of credit secured against your house. You can borrow up to 65% of the market value of the house less anything you owe on your mortgage.
HELOCs have lower interest than conventional lines of credit however have higher interest rates than mortgages. They are used for renovations and home additions. Renovations and additions add to the cost of your home and incurring interest on that debt makes the costs even higher.
As debated in our article Rent vs Buy: The Debate of a Lifetime buying a home may not be as financially beneficial as first thought. Now with the additions and extra interest cost from the HELOC your home value needs to increase even further just to break even!
How to decrease the additional costs to your home
The easiest way is to save money and use cash to pay for the renovations. But before you do, consider the value to your life and to the value of your home of the renovation or addition. If the renovation or the addition is to keep up to your neighbours it is not a good decision! If the renovation or addition is needed based on your growing family (i.e. addition of children or an elderly parent) than the additional cost may be worth it!