Suppose you are renovating your house. You have some savings, but you also have to borrow for it. The first costs of the renovation will come in at the end of 2008 (architect design/building application) and the renovation will not be ready until 2010 (first look for a contractor, wait until he is available to start the works, which will then also take a few months ).
How do you best work:
1) you pay the first invoices that come in from your savings. When that is gone, you use the money from a loan.
2) you immediately open that loan, and you only use your savings for the last invoices. (beneficial scenario if you think that interest rates will rise in the coming year. On the other hand, the interest rate on a loan is usually higher than the yield of savings, so in that sense this scenario does not make sense.)
Are there certain advantages/disadvantages that you should definitely not overlook with this choice?
Answer
Dear Ms,
In addition to the economic factor of interest on borrowed money, there is also the construction reality.
Only a few candidate builders (regardless of whether an architect is called upon or not) succeed in realizing the construction/renovation within the pre-estimated budget. This does not necessarily have to do with additional prices charged by contractors, but with unforeseen circumstances or changes in the construction program:
eg when breaking down a wall it turns out that there is no foundation under the remaining wall parts… the result is breaking away extra wall parts and rebuilding
For example, when designing a bathroom, the candidate builder will look at the materials as offered by the contractor and see a more luxurious version in the showroom…
So:
If your budget more than covers the costs of the first invoices for the architect (and you therefore still have budget space left), it is best to pay these with your own funds to avoid interest two years before the date. In order to revive the economy and construction (which will probably see its dip later this year), we may expect another fall in interest rates.
From the first invoices from contractors, however, it is recommended to pay them with borrowed money. Repayment of interest and capital can also be entered as a deductible item in your tax return. It also leaves you with an emergency budget of your own resources to perhaps afford some extra luxury in the finishing phase.
Kind regards,
ir. Patrick Godelie
Answered by
prof. ir. Patrick Godelie
Applied Sciences Civil Engineering Special License Safety Techniques
Avenue de la Plein 2 1050 Ixelles
http://www.vub.ac.be/
.