Borrowing to renovate your home
Whether you’ve just moved into a fixer-upper, or you’ve been wanting to freshen you property up for years, renovating is a big, and potentially costly, undertaking. Here’s some tips for how to get your finances in order, so you can spend your time choosing fabrics and finishes for your spruced-up place.
Understand the costs
Renovations are famously difficult to cost properly. This isn’t just because unforeseen problems might arise to blow your budget (although this is very common); cost creep based on deciding to get nicer flooring or a fancier countertop mean your best-laid financial plans can easily be overwhelmed.
If your renovation has major structural elements, you’ll need an architect or draftsperson to design up your dream first. And then it’s time to find some builders and get some quotes.
Ask neighbours and friends for recommendations of builders, then pay close attention to the details of the quote; the cheapest might be the best, but sometimes you can buy added flexibility to make changes during the build. Renovation costs can be surprisingly high: even cosmetic changes are expensive, with an average bathroom renovation hitting $20,000 very quickly.
Once you’ve decided on a quote – including extra funds for any new furniture, and at least 10% on top to cover delays – it’s time to find the money.
Offsets and equity
If you’ve been in your property for more than a few years, you might be able to access funds through an offset facility, or by realising the equity you’ve built over time.
Offset: If you have a variable-interest loan, you might have opted for an offset account which allows you to pay extra off your loan over time. And if you have kept ahead of your repayments – well done! – you will have an offset balance that you can access to help fund your renovation.
Equity is simply the amount of money your property is worth, minus the money you still owe on your mortgage. You might have purchased a property 10 years ago with a $500,000 loan, and that loan might now be $350,000. Your property might have increased in value to $800,000. So your equity is the $800,000 value minus the $350,000 loan: $450,000.
Banks and other lenders generally take this equity into account, and might lend you a significant percentage of that equity, via new or refinanced loan (provided you are able to afford the repayments).
If you haven’t been in your place for very long and you’re looking at a smaller renovation, such as a facelift on your kitchen or bathroom, a personal loan might make sense. While these loans carry higher interest rates that home loans, the time to pay it off is much shorter. If you’re a good saver, you can end up paying for the work over the course of a year or so, reducing the overall interest on the project.
If you’re undertaking a large-scale renovation and haven’t built up much equity, take a deep breath and consider a construction loan or building loan.
In simple terms, these loans mean the bank lends you money to cover your renovation as the costs are incurred. Some renovations can take many months, and even more than a year. A construction loan means you’re not paying off the total amount from day one. As each construction invoice comes in, you can borrow (and immediately start repaying) the mount.
These loans work like a line of credit, and some lenders have interest-only options for a fixed period of time, which can help you manage costs while the work is being done.
Talk to us
Renovations are a terrific way to add value to a property, as well as increasing your enjoyment while living there. But the costs add up fast. Choosing the best way to fund your renovation means considering your existing equity, your ability to make repayments, the cost of the renovation, the value it will add to your property, and the length of time the renovation will take to complete.
Contact us at Mortgage Broker Melbourne if you’re planning a reno, and we’ll help you work out the best way to cover the costs, complete the renovation, and enjoy your improved property into the future.
Marc has been a professional lender for 28 years. After beginning his career in 1990 with a UK Building Society, he moved to Australia where he held several different retail banking roles. In 1999 it became clear to him that a mortgage broker would eventually become an obvious choice for someone looking for a home loan so he took the plunge and became an independent broker. He hasn’t looked back since!