How to finance your home renovation
As a result of self-isolation and working from home, 2020 has seen a lot of us spend more time in our homes than ever before. The increased time at home has resulted in many homeowners exploring ways in which they can improve their living spaces. According to property website Domain, we’re experiencing record high rates of homeowners who are upgrading or renovating their properties across Australia.
Some of the most common renovations or additions include adding a swimming pool, adding another bedroom, or upgrading a kitchen or bathroom.
You may presume that you need savings to fund the cost of the renovation, but it is often overlooked that many homeowners may have the ability to borrow additional funds from the bank.
The type of finance required will vary depending on the type of renovation that is being undertaken. Below, we’ve outlined the different types of loans that may be available for homeowners looking to undertake a renovation.
Ways to finance your renovation
Get a construction loan
A construction loan is specific to building or renovations works. For example, if you’re wanting to complete structural renovations (e.g. adding a bedroom), you will need to take out a construction loan that is subject to bank approval as you’re altering the roofline of the home. You’ll most likely also need to seek the approval of council before proceeding.
The bank will release progress payments to the builder as you move through agreed milestones of construction. The main benefit of a construction loan is you aren’t paying interest on the full amount all at once, therefore saving you money whilst you build.
Apply for a personal loan
A personal loan is a form unsecured lending which provides full flexibility on the use of the funds. It’s highly likely that the interest rates on a personal loan will be significantly higher than your home loan as the bank has nothing to secure the borrowing against (for example, for a mortgage the bank has your home as security).
A personal loan will generally be a lot more accessible to you as there are less criteria required for approval and could be good for smaller expenses that can be paid back relatively quick (for example, recarpeting or painting).
Redraw from your home loan or offset account
This is a consideration for those who have redraw options available on their home loans or cash savings in their mortgage offset accounts. Not all loans have these options and they are generally only available on variable rate home loans. If you’d like to know if you have this facility, it’s worth getting in touch with your bank or mortgage broker.
Access equity from your home
When you purchase a home and the value of your property increases, this increase in value minus what you owe to the bank is known as equity. Even if you don’t have the cash savings, most banks will allow you to access some of this equity to fund potential renovations.
Speak to your bank or mortgage broker to see how much equity you have available in your property.
Review your existing home loan to free up cash flow
Reviewing your existing interest rate and loan structure could potentially reduce the cost of your mortgage repayments before you even consider renovations. Your mortgage broker will either negotiate a better rate with your current lender or move you to another bank if required. This means if you borrow additional funds for renovations, the increased mortgage costs could partly be paid for through the savings you make on your existing home loan.
What are the benefits of renovating your property?
Adds additional value
Spending additional funds on your home to renovate it may increase the appeal and the value when it’s time to sell. The increased value leads to increased equity, which may also provide an opportunity to build an investment portfolio or purchase a holiday home.
Improves your lifestyle
Adding a lick of paint, recarpeting, installing an office or putting in the pool or outdoor area you’ve always wanted, are all things that could add considerable enjoyment to your daily life.
Modifying your current home may be a more suitable option to buying a new home as you can avoid real estate fees, stamp duty and increased mortgage repayments, as well as the hassle of moving home.
How do you know renovating is the right option for you?
At Orium Finance we recommend talking to your bank or mortgage broker to see what financial solutions are best for you when it comes to a potential renovation. For more information, get in touch with the team from Orium Finance for a free assessment by clicking here.
Speak to our team today to see how you can achieve your financial goals.
One of our mortgage brokers will contact you to discuss the following:
- Get to know your financial objectives
- Help you to understand your borrowing capacity
- Take you through how we can assist you with your finances
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