Welcome to RateSupermarket.ca’s Ask the Experts series! In each post, we’ll look at real financial issues from readers, and get the expert take on how they should proceed. Want to take part? Email your finance question to Penelope@ratesupermarket.ca with the subject line Ask The Experts. Here, parents Nina and Keith wonder if they should add on to their existing home to accommodate their family – or if a bulldozer is in their near future.
Keith and Nina: Drawing The Line On Home Improvements
- Household income of $180,000
- House value of $520,000
- Remaining mortgage of $135,000
- No RRSP savings, but both are on track to get healthy defined pensions through their workplaces
- Education savings in place for two children, with $100 contributed to each monthly
- One car, paid off
Keith and Nina need a bigger space but don’t want to move from their Scarborough-area home. They own a house on a large plot. For that reason, they are looking at two choices:
- Extending their existing home.
- Tear down their existing house and build two semi-detached homes with the intention to rent one out, or sell it.
Keith estimates the costs for each of the scenarios would be:
- $150,000 to extend their existing home
- $650,000 to tear down their existing home and build two semi-detached homes at 1,500 square feet each.
Brandon Parkes, Consultant, Investors Group Financial Services
Brandon’s Recommendation: Build Up Rather Than Tear Down
I think that based on the information provided and considering their options, making an expansion on their current home would be the better choice.
If done well and done properly, the addition can instantly generate additional equity in their home beyond the amount spent for the renovation. It will not be a major change (relative to knocking down your house) and will allow for the additional space that may be required for what sounds like a growing family.
The commitment to the other choice requires a much larger capital expenditure. If their home was completely paid off, the choice to do the knockdown may be a better option, but it is a major expense at this point in time. Creating another large debt, and with two young kids and numerous other expenses, may not be the best solution at this time. Living with two adults and two growing children in a three-bedroom semi would also be a bit cozy, thus another reason why I would choose the first option. If the home was completely paid for, I may consider crunching some numbers and look at doing the two-semi option, but with the intention of renting out both and living elsewhere.
Another reason why I would consider option one is that there is a great opportunity that is not being taken advantage of with regards to their children’s education saving. Ideally, if they can afford it, they should maximize the gain from the CESG (government grant) by contributing $208.33 a month ($2500 per year, per child) instead of the $100 per month. They will receive additional grant money and take advantage of a very strong market and dollar cost averaging for the full time from now until the kids reach post-secondary education.
Also read: No RESP: A $38,000 Mistake>
Not having the massive financial commitment towards a knockdown also allows for other options that may better their situation and free up capital sooner. This includes saving more towards retirement, since they are not taking full advantage of their RRSP.
Rubina’s Recommendation: Build On Existing Value
I have to agree with Brandon that extending their home to accommodate their family needs will be more beneficial to them in the long run. The cost to build their home will only add to the value of their existing property. They will also avoid a lengthy and expensive process of getting permits from the city to have their property divided into two, delaying their end goal of having a larger space to live in even more. Since their mortgage is low, the cost to carry an extra $150,000 would not be difficult and they will not be compromising on price by spiting their lot into two.
Along with Brandon’s recommendation, I also suggest they put money aside in an emergency fund; a bigger house means more expensive problems. They both are paying into a defined benefit plan at work, as long as that continues they should be set for a healthy retirement income. They can also consider their home as one of their retirement assets and make plans to possibly downsize and sell when they do retire. This decision will keep the largest amount equity in their hands in the long run.
Also Read: How to save a six-month emergency fund>