Finance options for renovations
As homeowners, we all want to add value to our property, and possibly the best way to do that, is through renovation. Whilst the idea of renovating is simple enough, the reality is that improvements to the home cost money. The good news is that there are plenty of choices available if you need to take out a loan to complete your renovation.
Whether you take consumer finance, add the renovation cost to your current home loan or take out a new home loan to cover the costs, there’s plenty of options to consider — and remember to plan your renovation before you begin your renovation adventure.
How Renovation loans work
Renovations loans will be different for everyone, the amount you need to borrow, your existing loan balance, your property value and what the type of renovation you’re undertaking. The important first step to take is getting a valuation done on your property – you can organise a free valuation by clicking here.
The three main finance options for renovation loans are:-
- Using a credit card or personal loan
- Adding the renovation cost to your existing home loan
- Refinance to lower interest % rates and borrowing the extra
Consumer loans for renovations
A credit card or personal loan can be a good option for small renovation projects, where the cost is fixed in advance. You can pay off the balance earlier than you would by adding the extra to your mortgage – typical personal loan terms are three to five years. And, with a personal loan, you’ll have fixed regular repayments enabling you to build in the cost to your budgeting. But on the downside a credit cards and personal loans can attract a higher interest rate.
Key points:-
- Unsecured credit will attract a higher interest % rate
- The loan term will be shorter than your home loan term
- Consumer finance have quicker approval processes and can be easier to obtain
- Personal loan limits are usually maximum$50,000
Add the renovation cost to your home loan
This is one of the most popular ways Australian’s fund their renovation projects but it’s important to know you can be limited in the amount you can borrow by the value your lender puts on your property.
The best first step is to have your broker do a valuation on your property to determine its current value. The properties current value it will tell you what your Loan to Value (LVR) ratio is and will have a rough estimate of how much they lend you for your renovation project. Most lenders won’t have much of an issue lending you enough money so that you’re LVR is at or below 80%. Any higher than that and you’ll have to prove the ‘purpose of funds’ and potentially pay Lenders Mortgage Insurance (LMI).
An example:
Ben bought a property in 2010 for $700,000 and in 2015 his home loan balance was $600,000. He wanted to renovate his kitchen and his bank sent a valuer to his property who valued it at $850,000. Ben’s LVR was 70% and his bank said they would lend him $80,000 as that would increase his outstanding loan balance to $680,000 and that would be 80% of the current value of the property.
Key points:
- Your loan balance will increase and so will your repayments
- You may be able to reset your loan term to 30 years
- If you increase your LVR over 80% you may have to pay LMI
- You are limited to your existing lenders property valuation
Note : some lenders have no LMI loans to 85%. Other lenders have loans for Medical and Legal & Accounting Professionals to 90% or 95% with no LMI
Refinance your home loan for your renovations
A broker acts in your best interests – legally that is our role – and we will determine if you get a benefit from switching banks. Many times after a few years with one bank, your money by that bank is considered “old” and you are expected to stay with them even when the rates are not competitive, and they are advertising lower interest rates to attract “new” money.
One of the most common catalysts for switching your home loan is when a borrower’s existing lender places a lower than expected value on the borrowers property, limiting how much the borrower can spend on their renovation.
The reason a valuation is so important is because lenders will use the current value of your property to determine your LVR which will impact how much equity you have and how much additional money you will be able to borrow.
Valuations can differ greatly different between lenders
When you want to use equity in your property for renovation, you may want your property valuation to be as high as possible. This is because it will lower your LVR and increase your potential budget for your renovations.
With valuations being so critical to renovation loans, it’s important to know that banks all use different valuers, and they may value your property differently. If you use the wrong valuer, you may not be able to borrow the money you need to consolidate your debts, renovate your property or make an investment.
A case study:
Adam bought a house for $900,000 in 2012 and took out a loan for $800,000. By 2015 his loan balance was $750,000 and he wanted to access some of his equity to renovate his property. His current bank had a valuer asses that his house was worth $1M. Unsure if that was the right value of his house, Adam approached a mortgage broker who had another lender value his property at $1.2M.
Adam ‘s current lender assessed his LVR to be 70% and said he could access up to $50,000 for his renovations, without having to pay LMI. The second lender assessed his LVR to be 58% and said he could access $210,000 for his renovations without having to pay LMI. In this situation Adam would be able to borrow an additional $170,000 for his renovations by selecting a lender whose valuer thought his property was worth more.
Does it matter what I’m renovating?
If you are doing non-structural renovations, and not needing to increase the value of your property to achieve finance, most lenders are OK to provide “cash out” for your renovations. Many do have limitations on the amount of “cash out” and request builders quotes from $50,000. Organise a chat to talk over your plans so we can review which lenders suit your needs best.
Renovations that generally add value include:
- Features that cut energy costs such as solar panels
- Kitchen upgrades
- Bathroom upgrades
- Replacing old or worn carpets and floorboards
- Upgrading window treatments
- Painting
- Landscaping
- Roof upgrades
- Storage additions
