Any renovation project, large or small, can be all-consuming in terms of your energy and money. Renovations can increase your property's value and give you the dream home you've always wanted. However, it's likely to be an expensive process and many homeowners delay renovations because they don't know how to cover the costs.
Here we'll go through the various ways you can get the funds you need to pay for your renovations. Whether you want to make a few finishing touches to your home with the help of a paint job or completely turn your home into something magical, there’s an option to suit your needs.
1. Home equity loan
This is probably the most common way people borrow money when they want to renovate. It involves borrowing against the current value of your home, before any value-adding renovations. You won’t be able to borrow the full value of your home but, without mortgage insurance, you can usually borrow up to 80 percent of its value if you own it outright. Your lender may need to conduct a valuation of your home in order to estimate your current Loan to Value ratio(LVR) and ultimately calculate how much equity you can access.
Top up your existing variable rate loan
You may be able to borrow additional funds against your existing home loan if you’ve already paid off a portion of your home loan, or your home has increased in value over time. When accessing equity it’s important to be aware that you are increasing your debt and your repayments are likely to increase, or it may take longer to pay off your loan in full.
Use a redraw facility
With a redraw facility in your home loan, you may be able to redraw any extra funds that you have been paying towards your home loan, to fund your project. You can access the extra funds that you put in to pay off your home loan faster, over and above the minimum monthly payments.
Use savings from your offset account
An offset account is a kind of savings account linked to your home loan amount. Any funds in this account offset how much interest you are charged over the course of your loan term. If you have money in your offset account, consider using these funds to pay for your renovation. You can leave the money there, offsetting your home loan, until it's time to make a payment.
2. Construction loan
If you’re looking to make some big structural changes to your home, you may want to consider whether you meet the conditions for a construction loan. With a construction loan, you can progressively draw funds over a period of renovation in each stage as required, to help you save on interest.
These stages may include:
Foundation
Frame and brickwork
Lock up
Second fix
Completion
Your lender may send qualified valuers to check on the construction progress against the planned stages. Preparing detailed construction plans and having a budget can help your lender determine the amount to offer you.
3. Personal loan
If you’re only making minor renovations or you don’t want to go through the hassle of refinancing – personal loans are usually capped at around $30,000 – this might be suitable, but interest rates on personal loans are higher than on home equity loans.
This can offer you a sense of flexibility but may also complicate things for you because you’re taking on another form of debt. You may have to deal with different repayment plans if you’re still paying off your current home loan.
A major drawback to using a personal loan to fund your renovation is that you can expect higher interest rates than if you used an equity home loan.
4. Credit Card
This option is only if you want to undertake really small renovation projects. Using a credit card debt can offer you more flexibility to purchase items needed for your renovation. Beware that credit cards have no set repayment period and typically come with hefty interest fees. There are some credit cards that come with an interest-free period where you will not be charged interest until after that period and can be an option as long as you can responsibly manage your repayments.
5. Do not overcapitalize
Overcapitalisation occurs when the value of the property does not increase by the same amount you spent on renovating the property. There are very few exceptions to the rule that your renovations should add more value to your home than they will cost to carry out. Think about how the money you spend on a renovation will increase the value of your property. For example, consider making changes that would appeal to the majority of potential buyers to help you sell your house faster and at a higher price. Compare the value of similar properties in the area and budget accordingly.
A good finance broker can save you time and money, and give you peace of mind. But, remember, only work with finance brokers who are members of MFAA - they are the Essentials of Borrowing.
Jenice Lee at Finance Star is MFAA approved finance broker and is not your average mortgage broker.
Contact us if you want to find out more about how we can help with your finance options.
FINANCE STAR Credit Representative Number 529071 is authorized under Australian Credit Licence Number 389328.
This article provides general information only and has been prepared without taking into account your objectives, financial situation, or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax, or financial advice and you should always seek professional advice in relation to your individual circumstances.
Original articles from:
https://www.lendi.com.au/inspire/finance/how-to-fund-your-renovation/
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