Stéphanie *, 40, is naturally worried. She is more so since her divorce which forces her to rely only on her salary to meet the needs of her two children. At the dawn of adolescence, her daughter and son need separate bedrooms so that they can each respect their privacy. Seeing the expensive real estate market in the suburbs, Stéphanie thinks of adding a floor to her little bungalow.
Posted on March 21, 2021 at 9:00 a.m.
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The situation
But does it have the means?
“I estimate the cost of the renovations to be $ 150,000,” she says over the phone. It is a major investment and I wonder if it is a good idea, because I especially do not want to make a bad choice which would jeopardize my retirement. If you tell me it’s too expensive, I could try to make a less ambitious project. ”
“I also wonder what will be the added value of this renovation to the price of the house,” she continues. Is it worth it ? In my neighborhood, some neighbors did. ”
However, Stéphanie does not intend to sell her house in the short term and instead plans to live there when she retires in 20 years.
“How should I finance the project ?, she wonders. Is it better to use my savings or break my mortgage contract? My bank offers me a rate of 1.49% for five years and another institution, 1.99% for seven years. I have three years to go and the penalty is $ 7,897 plus $ 1,200 for notary fees and a home appraisal. ”
Within three years, Stéphanie believes that she will have to buy a new car, because public transport in her suburb is not efficient and she expects to have to play taxi driver for her teenagers. There is also a project to purchase a family cottage with his siblings estimated at $ 42,000.
Numbers
Salary: $ 110,000
RRSP (including the retirement fund from his current job): $ 435,000
TOTAL: $ 28,700
REEE: 14 220 $
Non-registered investments: $ 34,500
Savings account: $ 96,000
Emergency fund: $ 40,000
Mortgage: $ 150,000
Estimated value of the house: $ 300,000
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A good investment?
First of all, will the renovations Stéphanie envisioned increase the value of her property? “Adding a floor or extending it certainly gives value to a property, regardless of the market in which you are at the time of the sale, because you add living space”, says Martin Desfossés, coach in real estate at DuProprio. “In this case, we also add a quality of life, because we meet specific needs for the family. ”
“Regarding the return on investment,” he continues, “it is more nuanced. It depends on the average property value in the neighborhood and the payoff is more interesting in a homogeneous neighborhood. ”
Renos and retirement?
PHOTO HUGO-SÉBASTIEN AUBERT, PRESS ARCHIVES
Sylvain B. Tremblay, Vice-President at Optimum Gestion de placements
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Sylvain B. Tremblay, vice-president at Optimum Gestion de placements, analyzed the bungalow expansion project. First observation: Stéphanie has an enviable heritage for her age.
“She’s a frugal person, she hasn’t wasted her time and she’s doing her business with her $ 400,000 in RRSPs. We don’t often meet people like that, ”he said in a virtual interview.
“For me, it’s unequivocal, we’re renovating,” continues the expert. His annual contributions to the pension fund are $ 17,600 per year [5 % employé et 11 % employeur]. In 20 years, she will have accumulated the tidy sum of $ 1,395,600 at the rate of 4% annualized, in addition to the pension from the two governments, which will be $ 2,350 per month for life and indexed. She doesn’t have to worry about her retirement. ”
For the financing of the renovations of her house, Stéphanie has already planned the blow, it is in her nature. She saved $ 96,000, of which $ 15,000 is reserved for a car. She also has $ 28,700 in TFSA. So $ 109,700 is available now for the addition of a floor. She could also use her non-registered investments of $ 34,500. However, Stéphanie had in mind to keep them for the purchase of a chalet.
$ 40,300 is missing.
“Since she is frugal and worried by nature, she has every advantage in paying for her renovations while keeping control over her financing. It’s a psychological question, explains the vice-president of Optimum Asset Management. If you just consider the financial aspect, someone with a different profile might choose to mortgage their house as much as possible and invest their savings in the markets, betting that they will continue to be so generous. ”
In the latter scenario, the penalty for breaking the mortgage should not be high. This is not the case with Stéphanie, whose 3.09% contract ends in three years. Although the new rates offered to her are lower, the tenor of the penalty cancels out what she could save.
“The penalty of $ 7,897 is really very expensive,” exclaims Sylvain B. Tremblay. She’d better take out a home equity line of credit with her financial institution and have the rate fixed for three years. ”
Stephanie will then be able to choose the amount of monthly, bi-weekly or weekly payments. Then, in three years, she’ll just have to include the total outstanding in her new mortgage contract.
The car and the chalet?
According to Sylvain B. Tremblay, the current mortgage of $ 150,000 is not expensive, which means that Stéphanie can manage to set aside additional sums every month. Its savings bear witness to its savings capacity. She therefore has the option of adding the other two projects to her list without sacrificing her retirement.
For the chalet, she needs $ 7,500 this year, while for the purchase of the car, she must accumulate $ 25,000 in three years in order to reach the $ 40,000 necessary, if this project cannot be delayed.
“In conclusion, she must continue to put $ 6,000 per year in RRSPs so that her employer can add $ 11,000,” explains Sylvain B. Tremblay. As for the rest of the budget, she will have to add a mortgage margin repayment of a minimum of $ 100 per month, plan $ 7,500 in savings this year for the cottage and $ 8,000 for three years for the vehicle. ”
* Although the case highlighted in this section is real, the first names used are fictitious.
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