Financing a renovation this fall: where interest rates stand before the October 28 Bank of Canada decision

If you're planning a bathroom, kitchen or basement job this winter and you'll be borrowing for part of it, the next few weeks matter. The Bank of Canada sets its rate on October 28, and this morning's jobs report just changed the picture. Here's where things stand and what it means for a renovation budget in London.

Where rates stand today

The Bank held its rate at 2.25% on September 2. It said inflation has been running near 3%, mostly because of gasoline, that the economy grew 3.3% in the second quarter, and that it is "prepared to adjust monetary policy as needed." Statistics Canada later reported August inflation at 3.0%, well above the Bank's 2% target. That is why talk of a rate increase, not a cut, built up through September.

What this morning's jobs report changed

Statistics Canada reported today that the country lost 68,300 jobs in September, after losing 41,700 in August. Economists polled by Reuters had expected a small gain of about 9,200. The unemployment rate rose to 6.5% from 6.4%, and wage growth for permanent employees came in at 2.3%.

A weak job market makes a rate increase harder to justify. Reuters reported after the release that money markets are not pricing in an increase on October 28, though they still expect one in December. Bond yields fell on the news, and those yields are what fixed mortgage rates follow.

The common ways to pay for a renovation

• Savings. Still the cheapest option. No interest, no approval, and no risk if rates move.
• Home equity line of credit. The usual tool for a mid sized job. The rate floats with prime. Rate site WOWA lists the lowest advertised rate at 4.45% today and suggests prime plus 1%, or about 5.45%, as a fair assumption at the big banks. A stand alone line can go up to 65% of your home's value, and up to 80% when combined with your mortgage.
• Refinancing or adding to your mortgage at renewal. Worth a look if your renewal is close. WOWA shows the lowest 5 year fixed rate at 4.34% and the lowest 5 year variable at 3.25% today, with big bank 5 year fixed rates between 4.79% and 5.34%. Breaking a mortgage early usually means a penalty, so ask for that number first.
• Unsecured loan or line of credit. Faster to arrange and no lien on the house, but the rate is higher. Better suited to small jobs you can pay off within a year or two.
• Credit card or store financing. Fine for a short promotional period you are sure you can clear. Expensive if the balance carries.

What a quarter point really costs

Here is our own arithmetic, as an example only. Say you put a $40,000 renovation on a line of credit at 5.45%. Interest alone is about $182 a month. If the Bank of Canada raised its rate by a quarter point and your lender passed it on, that would climb by roughly $8 a month, or about $100 a year.

So for most projects, a single rate move is small next to the decisions you control: the scope of the job, the finishes you pick, and how quickly you pay the balance down. A change of plan on tile or cabinets will move your budget far more than the Bank will.

For landlords

How a renovation is financed and how it is treated at tax time are two separate questions. The Canada Revenue Agency separates current expenses, which restore a rental unit to its original condition, from capital expenses, which improve it or give a lasting benefit. Painting between tenants and replacing a kitchen are not treated the same way. Keep invoices that describe the work clearly, and speak with your accountant before a large job so there are no surprises in April.

Six practical moves before October 28

• Get your quote first. You can't choose the right financing until you know the real number. Ask for labour and materials shown separately.
• Arrange the credit before you need it. A line of credit costs nothing until you draw on it, and approval takes time. Set it up before the job is booked.
• Add a cushion. Older London homes hide things behind walls. A contingency of 10% to 15% is a common rule of thumb.
• Test your budget at a higher rate. Run your payment at half a point above today's rate. If it still works, you're fine either way.
• If your mortgage renews within a few months, ask about a rate hold. Many lenders will hold a quoted rate for a set period, which protects you if rates rise.
• Check rebates before borrowing. Our winter prep checklist covers the grants and rebates open to London homeowners and landlords.

We'll update this after the October 28 decision. If you're pricing a project and want a clear written quote to take to your lender, get in touch.