Renovating has the potential to be both exciting and very stressful all at the same time. Are you a homeowner that has bided their time since purchasing a fixer-upper? Perhaps you’ve outgrown your home and need to modify it to suit or simply want to refresh and upgrade. Whatever the reason, you’ll need access to significant funds. Home renovation loans are one way to achieve this.
More and more homeowners are renovating to create the ideal home rather than selling and hunting for another home. There are great benefits in tailoring your existing property to suit:
- You get to stay in your neighbourhood
- It can be significantly cheaper than selling and buying
- Adds value to your home and makes it easier to sell in future if desired
- Gives you the opportunity to create your dream living environment
What Are Home Renovation Loans?
Home renovation loans, also known as home improvement loans are loans taken out for the specific purpose of renovating your home.
What Types Of Home Renovation Loans Are There?
There are a few options available when it comes to financing your renovations:
Construction/Extension Loan
This home renovation loan won’t suit everyone. A construction loan is only viable when you will be making structural changes to the home. So a kitchen or bathroom revamp is unlikely to qualify.
To secure this type of loan, the value of your home is assessed and considered in terms of how much value the works will add to the property. The amount granted is determined with this in mind. The funds aren’t usually released in stages in-line with the renovation schedule to ensure the funds are not used for anything else.
Home Equity Loan
This is a loan that allows you to borrow against the value of your home using its equity. Equity refers to the amount your home is worth, vs how much of it the bank still owns.
Using this increase in value as security, you can obtain a loan. Essentially, you’re adding on to your mortgage. Your repayment length and terms won’t change, but your monthly payments will. This is a popular choice for home renovation loans.
Mortgage Redraw
Mortgage redraw allows you to ‘draw down’ funds you have paid over and above your regular repayments. While not strictly speaking a loan, it will require assessment and approval from your bank. This is a great way to ‘borrow’ under the same terms and conditions as your mortgage.
Keep in mind that your interest repayment is based on how much you owe, so your repayments will increase once you draw down.
Personal Loans
Personal loans generally aren’t suited to renovations as they tend to be approved in smaller amounts. They are not recommended for renovations usually as they attract higher interest rates than the loans mentioned above. Not all banks will be willing to approve a personal loan for renovations, so it’s best to discuss this with your bank or broker.
How Much Can I Borrow?
The amount you can borrow for a renovation loan varies between 60-95% of the home’s value. The amount approved is dependent on a few factors such as:
- Your home’s value and estimated increase in value post renovations
- The works being done i.e small update or knockdown rebuild etc
- Who is completing the renovations (licensed builder or DIY)
- The type of loan you are applying for (personal, low doc, mortgage redraw)
Home Renovation Loan Risks
Strictly speaking, taking out the loan itself isn’t high risk. However, without careful attention to your budget and ongoing costs you may run into trouble. For many renovators, they underestimate the amount needed or do not stick to the budget.
This can cause significant issues, particularly in the case of construction loans where the bank wants to see each stage completed before releasing more funds. The potential to end up with half-done renovations and no funds to finish the job is very real.
In order to help your renovation go smoothly, we recommended:
- If renovating to sell, focus on the aspects of your home that will help it sell and increase value. Areas such as the kitchen and bathroom are always worthwhile.
- Ensure you have development approval (DA) before undertaking any renovations. This ensures you will not run into costly legal issues later down the line.
- If you’re buying to ‘flip’ a property, discuss it with your broker first to ensure you can afford the purchase and the renovation. Otherwise, you may find yourself in financial distress unable to sell and unable to complete the project.
- Outline your budget in detail with your builder at the outset. Schedule fortnightly or monthly reviews to ensure you are staying on track.
- When applying for the loan, allow a 5-10% margin of error when stipulating the amount you wish to borrow. This will help overcome unforeseen problems during your renovation.
Bring Your Renovation Vision To Life
The expert brokers At NSW Mortgage Corp can help you find the ideal loan. If you’re wanting to rebuild or refresh your home and need some financial help, contact us today on 1300 137 778.
