- Comments (13)
- Text Size: Down Up
moneysense.ca, 10/02/09
HRTC is nice but paying down the mortgage is nicer
Rob Smith, financial advisor and author of Dollars from Change, suggests an alternative to going out and spending ten grand just to take advantage of full credit under the Home Renovation Tax Credit program (HRTC). Recall that a homeowner would be able to get a refund of $1,350 when they spend on $10,000 on eligible home renovation projects, which works to a maximum refund rate of approximately 13.5%. Assuming that the homeowner doesn’t really need to make that spending (say they have perfectly serviceable kitchen cabinets), they could instead choose to channel it towards paying down the mortgage. If they are paying 5% interest on their mortgage, they would be make up the HRTC in mortgage interest savings in a bit more than 2 years and pay off their mortgage years sooner.
For instance, let’s say that a homeowner has a $200,000 mortgage amortized over 20 years. By making a $10,000 lump sum payment against the mortgage, the homeowner will end up saving $15,729 in interest costs over the life of the mortgage. Note that the interest savings adds up to more than ten times the tax credit available this year. Sure, you don’t get a nicer home and it does little for the economy but you’ll come out ahead in the long run.
moneysense.ca, 10/02/09
I would agree with this approach although a couple of factors should be mentioned:
1) Most renos will add some value to the house so that shouldn’t be ignored. Replacing older cabinets with newer ones is a great way to lose most of your money but they will be worth a bit more (but not as much as you paid).
2) Some renos are essential – if your kids are falling through rotten boards on your back deck then you should probably get a new one – credit or no credit.
CC: The analysis might not applicable to most households because the assumption of a fixed 5% mortgage is not true with many households. From what I have read online, most people have a prime – .5 to prime -1.0 mortgages. As a result, most people are paying 2.5% to 2.0% interest.
How about take the money and invest it into index funds? Maybe that is a better idea for most households.
This is another case of never spending/investing just for the tax benefits. Anyone who was planning renovations already just got a nice bonus, but it doesn’t help much for everyone else.
I do agree that you shouldn’t spend $8,650 of your own money on unnecessary renovations just because the government will cover the other $1,350.
And if you have $10,000 handy, paying down the mortgage can definitely be worth more in the long run.
However, I posted an article today on how borrowing for your renovations can make sense since it can basically be interest free if paid off within 5-6 years.
http://canadianfinanceblog.com/2009/02/10/borrowing-for-the-home-renovation-tax-credit-hrtc/
EconStudent: Fair enough. But new variable mortgages will typically be prime + 0.6% and a significant chunk still have fixed-rate mortgages. I’ll agree that 5% is probably on the high side but I think an estimate of 2.0% to 2.5% is too low as an average. My guess would be that the actual number lies somewhere in between.
Mike, SP: I would do something about the rotten boards at a high priority as well and classify it as a “need” as opposed to a “want”. Also, for folks in good financial shape, even spending some money on a “want” and having the Government foot part of the bill isn’t a terrible idea. But, I’d wager that a 15% bonus is tempting for many people to spend money they didn’t intend to. Rob is simply saying that there are other ways of saving even more and I agree.
It would be tough for most people to put money against a mortgage when instead they could have new hardwood or new kitchen cabinets. There’s no immediate benefit from paying down a mortgage.
The HRTC helps me since I was already planning on spending 15K on the house this year.
I think if you look at the HRTC from a government and economy perspective instead of a tax-payer’s/consumer perspecitve the tax credit makes more sense. The intent of the HRTC is to give the economy a little bit of a push. There are a couple of ways the HRTC achieves this.
First it pushes people that are thinking that maybe they would build that fence this spring/summer but weren’t too sure about doing it because of ‘the economy’ (even though they already have the cash saved up to do it and have reasonably secure jobs in addition to a healthy emergency fund).
Second, it maybe pulls renovation spending from next year into this year. Say some one was planning on replacing the fence in the backyard in the spring of 2010 and was planning on saving the cash to do that over 2009. Now they can still save the cash to do it over 2009 but they can maybe take a small loan or draw on a line of credit to do it this year instead of 2010 so they can get the $1350 tax credit (which should more than cover any interest charges provided they borrow for less than a year and they borrow less than half the amount they spent).
Interestingly we have seen the ‘pull purchases from the future to the present’ scheme in an the economy in the last 5 years. Can you name the industry it happened in? That’s right, the auto industry with the 0% purchase financing deals that started sprouting up about 5 years ago. That hasn’t worked out so well for the auto industry.
I wonder how well it will work out for the Canadian government and the home renovation markets. I suspect that some contractors will find themselves run off their feet this summer/fall and having plenty of free time to enjoy the profits they made in 2009 during the summer of 2010.
I suspect quite a few people are on fixed rates now. There was that little rate increase back around June last year when everyone locked in. Me included… 5.15% is where I stand locked in now… 2.XX seems like a dream to me!
[...] Here is the original: HRTC is nice but paying down the mortgage is nicer [...]
Renovations are going to be extremely important now that its a buyers real estate market. Buyers aren’t going to settle for a house that needs a ton of work. The houses that are renovated will move and the fixer uppers will stay on the market forever.
@adam: I’m locked in at 4.89 and I’m happy. If anything I’d be happy to refinance for a 10 year term at the same rate. I can easily make the payments and still have money left over to make accelerated payments. Hindsight is 20/20.
[...] Canadian Capitalist shows how, if you have $10,000 available, paying down your mortgage can provide a bigger benefit than the maximum HRTC credit. [...]
But, but, but saving money doesn’t help our economy. You’re supposed to go further into the hole to help your fellow Canadians.
[...] Capitalist describes in a post that you shouldn’t go out of your way to make use of the HRTC this year. By that he means that you may have better options, such as mortgage pre-payments or [...]