News Releases
According to a BMO Bank of Montreal survey, Canadians intend to use their savings to fund the more than $25 billion they are expected to spend in home renovations in 2004.
In a recent survey, sponsored by BMO Bank of Montreal and conducted by Ipsos-Reid, more than 76 per cent of Canadians who are planning a renovation within the next five years indicated that they intend to pay for future renovations with cash from savings.
According to Maria Racanelli, vice-president, BMO Bank of Montreal, Canadians who have been saving for home renovations are now faced with a big choice – should they invest in the stock market, which is generally expected to go up over the next few years, or should they invest in their house?
“With uncertainty in the equity markets over the past few years many Canadians chose to park investing dollars in short term investment vehicles such as bank accounts and money market funds,” said Racanelli. “Now that the Canadian economy is back on a more solid footing, for some the question is whether they should move those dollars into the market or use them to finance home renovations.
“People are asking themselves, ‘With all that investment money, should I sink it into a new kitchen or put it into the market?’” she said.
“Given how attractive interest rates are, our view is, leave your savings intact and utilize a line of credit that takes advantage of current low lending rates and doesn’t force you to choose between your house and an investment portfolio.”
Racanelli said that secured lending products offer the lowest lending rates available today. In fact, as a special offer, when you open a Homeowner’s Line of Credit between March 1st and May 31st 2004 you will receive an interest rate of 0.5% below prime (prime as of May 20th 2004 at 3.75%) for the first three months, plus we’ll waive the set up fees1 when you draw down $40,000 or more. This financing solution provides the kind of flexibility that makes it ideally suited for financing a home renovation project.
“One of the biggest risks homeowners face is not saving enough to cover hidden expenses or runaway costs that can typically surface during a significant renovation,” she advised. “If you’ve saved to a budgeted amount, the last thing you want to have to deal with is the need to find additional cash for unexpected over-runs. Setting up a personal or homeowner line of credit, in advance, provides you with a dependable safety net in the event your savings run short. It’s there, immediately, if you need it, and you only use what you need, so establishing a line of credit in advance can provide a very cost-effective way to deal with an emergency financing crunch.”
Racanelli said she appreciates that some Canadians simply prefer to wait until they’ve saved enough to pay for their renovations with cash. In fact, 47 per cent of those surveyed indicated they would not purchase anything unless they had the cash to pay for it.
“We applaud homeowners for their prudence,” said Racanelli. “But what they may not realize is that we have a number of borrowing solutions that can actually help them save faster by freeing up cash flow that may currently be tied up servicing existing debt.
“For example, combining all of your outstanding debts into one single plan at a lower interest rate can save you hundreds of dollars a month that you can redirect to savings that will fund your renovation,” she advised.
Racanelli explained that an individual with loans and mortgages totaling $135,000 and an effective blended rate of 7.12 per cent could save $373 in monthly interest by consolidating existing loans under a BMO Bank of Montreal Homeowner’s Line of Credit.
“The savings are quite dramatic,” said Racanelli. “In one year, you’ll save up to $4,500. For those that plan to renovate five years from now, this saving can add up to more than $22,000. Under this scenario, it’s easy to see how proper debt management can help a borrower become a much more productive saver.”
The BMO Ipsos-Reid survey showed that, among homeowners, one in four (26 per cent) respondents are planning a significant home renovation within the next 12 months with 15 per cent of respondents indicating a planned home renovation within the next three months. Nearly half (46 per cent) of all homeowners plan to undertake a significant renovation within the next five years.
Racanelli says her message to homeowners, particularly those who want to enhance the value of their homes before they put them up for sale, is “Don’t wait, do it now!
“You can’t ask for a better environment for investing in your home and building up your equity,” she said. “With interest rates at an all-time low and house prices at an attractive high, investing now in home renovations that will yield a return when you sell makes good economic sense and gives you the flexibility to take advantage of a hot housing market while it lasts.”
The telephone survey was conducted from April 20 to April 22, 2004, amongst a representative, randomly selected sample of 1,000 adult Canadians. The results are considered accurate to within ± 3.1 percentage points, 19 times out of 20. The margin of error will be larger within regions and for other sub-groupings of the survey population. Please visit www.ipsos-reid.com for more information.
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Backgrounder
Debt Consolidation: A borrowing solution that fits
Consolidating your borrowing needs can possibly help you:
· save money by taking advantage of an interest rate that’s often lower
· improve your cash flow
· pay off your debt, including your mortgage, sooner
· free up cash for other things
The example below demonstrates how an individual with loans and mortgages totaling $135,000 and an effective blended rate of 7.12% could save $373 in monthly interest by consolidating existing loans under a BMO Bank of Montreal Homeowner’s Line of Credit (currently as low as 3.75%) and use additional cash flow generated by the freed-up interest payments to accelerate savings for a planned renovation.
|
Presuming |
Balance |
Monthly Payment |
Interest Rate |
Monthly Interest |
Remaining Amort. Period |
|
Mortgage (fixed rate)* |
$100,000 |
$640 |
6.00% |
$494 |
299 months |
|
Credit Card |
$10,000 |
$499 |
18.00% |
$150 |
24 months |
|
Car Loan |
$15,000 |
$371 |
8.75% |
$109 |
48 months |
|
Personal Line of Credit |
$10,000 |
$300 |
5.00% |
$42 |
36 months |
Totals |
$135,000 |
$1,810 |
|
$795 |
|
|
Blended Interest Rate |
|
7.12% |
|
|
|
Versus a BMO Bank of Montreal Homeowner’s Line of Credit Interest Rate of 3.75%
|
Totals |
Balance |
Interest Rate |
Monthly Interest |
|
|
Current Situation |
$135,000 |
7.12% |
$795 |
|
|
Optimized Situation** |
$135,000 |
3.75% |
$422 |
|
|
Savings/Additional Cash Flow |
$373 |
|||
Additional savings that can be set aside for future renovations planned
|
Twelve months from now |
$373/month X 12 = |
$4,476 |
|
Five years from now |
$373/month X 60 = |
$22,380 |
*Assumes mortgage is repayable. Penalty may apply.
** Assumes Prime Rate remains 3.75% over next year.
*** Assumes customer qualifies for interest-only payments.
Additional Survey Findings
Borrowing Preferences
There is a wide chasm between homeowners planning to renovate in the next five years who have indicated that they intend to pay for future renovations with cash from savings and those who indicated they will borrow the money to fund their renovations. These Canadian homeowners expressed a declining preference for utilizing:
· a line of credit (7%),
· a personal loan (6%),
· a credit card (5%) or
· a home equity loan (4%) to fund their planned renovations over the next five years.
Gender/age differences
· Males are more likely to indicate that they are the primary decision maker for:
o Purchasing a new or different home (37% vs. 30%)
o Taking on a significant amount of debt (46% vs. 36%)
o Deciding which financial products to invest in (58% vs. 42%) while females are more likely to indicate that the decision is shared with someone else (65% vs. 58%, 57% vs. 50%, and 47% vs. 38% respectively)
· Three in four (74%) respondents indicated that they are not comfortable taking on more debt. This figure skews to females (79%) and those aged 55 years and over (82%).
· Females are more likely to indicate that they are the primary decision maker for home decorating decisions (65% vs. 29%) while males are more likely to share the decision-making with someone else (41% vs. 32%).
Renovation plans
· Among those who plan a home renovation within the next five years:
o the most frequently mentioned rooms for renovation are: kitchen (38%); bathroom (30%); bedroom (21%); basement (15%) and living room/family room (14%).
o the most frequently mentioned types of planned renovations are: cosmetic fixes such as paint or plaster (47%); maintenance or repairs (43%); a redesign to existing room or rooms (34%); and an addition or additions (13%).
· Among those who plan a home renovation within the next five years, renovation decisions are most influenced by:
o Friends or family members (25%)
o Personal preferences/own decision (21%)
o Home decorating or renovation television shows (20%)
o Home decorating, living or renovation magazines (17%)
Regional differences
· Respondents in Alberta are more likely than those in the eastern half of Canada (Ontario, Quebec and Atlantic) to indicate that they are comfortable taking on more debt (38% vs. 24%).