If you’re living in an older house or have recently purchased a fixer-upper, you may have started to throw around the ‘R’ word – renovations. Before you dive headfirst into planning what your new kitchen might look like, or how you’re going to redo an investment property, it’s important to give some thought as to how you’re going to fund a renovation.
Whether it’s smaller changes around the home or larger, structural changes, there are so many ways to add value to your house. Having your finances sorted before you begin renovating is important, so you know where you’re going to obtain the money from and how you’re going to use it. Creating a budget to stick to will ensure you don’t overspend, as renovations can often blow out quite quickly.
Here are our top tips for funding a renovation:
When funding a renovation, a construction loan is a viable and often the most common option. This loan will allow you to borrow against the value of your property, with the lender considering the estimated value of the property after renovation. When it comes to construction loans, Inovayt Finance Broker, Holly Crowe, says it’s all about the end product.
“Construction loans are available to everyone, but your ability to obtain them is based on what you’re providing to the bank to provide security for what the value of the home will be at the end.”
It’s important to keep in mind that a renovation only qualifies for a construction loan where there are structural changes made. Construction loans differ from other loans as the amount is released gradually as the renovation progresses. This is to ensure consumers aren’t using the amount for another reason.
Home equity release
An equity release involves accessing the equity in your home to complete renovations or put towards other purposes. According to Westpac, “If you’ve owned your home for a while, you may find that you have some equity in your home. If this is the case, a home loan increase may allow you to leverage the equity you have in your property to fund renovations.”
An equity release can be done where there are no structural changes being made to the dwelling – whether it be things like new tiles in your bathroom or landscaping in the garden. If you are planning on completing any structural changes, you will need to apply for a construction loan. An equity release can only be taken out on more established homes where equity has built up over time. If you’ve lived in your home for only a couple of years, you may not have acquired enough equity to be eligible for a release.
Read our blog to learn more about Using Your Equity to Invest.
If you’re planning on completing some renovations, the first thing you should look at is how big you want them to be. If you’re planning on making small adjustments here and there, taking out a personal loan is an option. These loans are often capped at $30,000-$50,000 depending on the lender, but they usually have a high-interest rate.
A benefit of taking out a personal loan to fund a renovation is a frequent payment schedule, which you can include in your budget and a set end date on the loan.
For tips on creating a budget, read our blog 5 Budgeting Tips and Strategies You Should Try
Line of credit
A line of credit is a great option for longer-term renovations and allows you to borrow money using the equity in your home.
“With a line of credit, you’re paying a premium interest rate to do what you like with a certain amount of money,” says Holly.
The benefit to this option is you only pay interest on what you’ve used of your available credit. This means you can borrow the exact amount needed to fund your renovations, therefore, avoiding paying large amounts of interest.
For example, if you’re a property investor with a million-dollar line of credit, you can distribute these funds at your call wherever you like, with no questions asked from the bank, provided you have securities in place to support it.
“A line of credit is really only for people who already own properties and they just want to leverage off that and not have to be pre-approved every time they want to buy something,” says Holly.
Mortgage redraw facility/offset account
Depending on how your mortgage is set up, you may have access to a redraw or offset account. All funds in this account are deducted against your mortgage, reducing the total amount of interest you pay. For example, if you have a mortgage of $600,000, but have $100,000 available in the redraw account, you only pay interest on $500,000 of your mortgage. Homeowners can use this $100,000 in the redraw account to pay for things such as renovations and the money (depending on the lender) is usually able to be withdrawn immediately. If you decide to use money from your redraw account to fund a renovation, it’s important to note the interest on your mortgage will increase, depending on how much money you take out.
If you have funds available in an offset account, using them before taking out a loan is often recommended, as you won’t need to pay interest against these funds.
Depending on the type of renovations you plan on completing and the limit on your credit card, you may be able to put the cost of renovations on your credit card rather than taking out a loan. The interest rates, however, would generally be higher than taking out a loan, so using a credit card for renovations is often suited to people undertaking minor renovations.
However, there is an increasing amount of lenders releasing credit cards with up to 24 months interest-free, so this is becoming a more popular option for people with a higher credit limit who can service these repayments on time.
For more information on credit cards, read our blog What Are Credit Cards and Should You Get One?
Whether it’s a large structural change or a smaller design, renovations can take up a lot of time and energy. Having a plan in place for how you’re going to fund your renovation will help you ensure the renovation is on track to play out just as you imagine it.