(Re)finance your way to renovation
About the author
Jane Slack-Smith has been named one of the Top 10 Property Experts in Australia by Money Magazine, one of the Top 4 Financial Influencers by Qantas and been awarded the Australia’s Mortgage Broker of the Year twice.
Why go through the worry (and expense) of moving when you can turn your current place into your dream home? While renovations aren’t always stress-free (or cheap) there are some straightforward ways to finance your property’s facelift, so it suits your post-pandemic lifestyle.
The type of renovation you want and the budget you’ll need will dictate the type of loan required so it pays to plan ahead. If you choose the wrong loan, you could be left with a skip load of unexpected debt.
Tradie comparison site hipages.com.au crunched the numbers in 2021 to reveal that significant home extensions and renovations start at about $100,000 and can cost up to $300,000 for a traditional family home.
Once you have the ballpark budget, then you can decide just how you might finance your home improvement.
Refinance your home
Renovation time just might be the perfect opportunity to review your home loan and see if it still works for you. Changing lenders could provide a better rate and additional product features, but you’ll have to pay for the costs of refinancing. Negotiating with your current lender and extending your loan with them may allow you to avoid such costs. Ultimately, if you renovate wisely then you will be increasing the value of your home and the long-term benefits should outweigh any upfront loan costs.
Redraw from your mortgage
If you’ve been making additional payments on your home loan over time, then redrawing some of the extra money could help fund your renovation. You’ll only be able to use the additional amount you’ve added so you’ll need to ensure it will be enough before redrawing. Just check whether your home loan has a redraw facility and verify whether your lender charges for such transactions.
Top up your mortgage
When you top up your home loan, you’re basically increasing your mortgage amount so you can borrow extra money against your home. If you have plenty of equity in your home and the ability to make extra repayments, then your lender may increase your existing home loan limit so you can pay for your home renovations. Remember, however, that topping up your home loan means taking on more debt.
Take out a construction loan
This option will allow you to access larger amounts of money for significant structural work, with the understanding that your property will be worth more once renovations are complete. To apply for a construction loan, however, you’ll need council approval and a fixed price building contract from a registered builder. The upside of a construction loan is that the interest is calculated on the outstanding amount, not the maximum amount borrowed. As a result, you have more money in your kitty, but you’ll only pay interest on the money you spend. It is also worth noting that construction loans usually come with slightly higher interest rates than a typical home loan.
Home equity loan (aka a line of credit loan)
Put simply, equity is the dollar value amount of your home that you own. Lenders will let you use that equity to fund a renovation through a home equity loan. Homeowners can generally call on up to 80 per cent of their loan-to-value ratio (LVR). To calculate just how much you might be able to dip into, subtract your current loan balance from your property’s value and then multiply by that by 80 per cent. This kind of loan will often charge a lending establishment fee and possibly a monthly loan account fee.
Getting ready before renovating
- Have a valuer review how much equity you have in your property.
- Research property values in your neighbourhood to ensure you are not overcapitalising and might not be able to recoup costs when it comes time to sell.
- Be aware that borrowing more than 80 per cent of your home’s value will require you to pay Lender’s Mortgage Insurance.
When weighing up your finance options, consider all the pros and cons associated with each option and get in touch with us to discuss what would work best for you.