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.