January 10, 2024 by Mortgage Choice South Melbourne
Plenty of people are choosing to renovate their homes now instead of buying new. And if you love where you live, this is a fantastic option. But how do you finance it? Here are a few of our top tips:
First, decide what type of renovation you want
The first step is to decide what type of renovation you would like to complete, as this will affect the type of finance options available.
- Consider your budget: The amount you plan to spend could change the type of finance options available for your project. If your renovation budget is on the lower end (say under $250,000) you will probably be considering 'loan increase' finance options like applying for a loan top-up.
- Construction vs non-construction: Major construction projects like moving walls or extending the property usually warrant a new loan like a construction loan, which can also give you access to some of the great features reserved for larger loans.
Option 1: Home loan top-up
A loan top-up is one of the simplest ways to finance your renovation. It involves an application to your lender to increase your current home loan amount. This means you keep your home loan type, interest rate and account number. The amount owing on your home loan is simply increased with the funds you would like to use to renovate.
Option 2: Redraw funds
If you have made a habit of paying more than your minimum scheduled home loan repayments, you may have some funds available to redraw. Most lenders don't charge a redraw fee, which can make it a cost effective way to renovate. Keep in mind though, not all home loans have a redraw facility (i.e. if you're on a fixed rate loan) so this may not be an option for you.
Option 3: Use equity
One of the most popular ways to finance a renovation (or investment) is to access the equity in your current home. Equity is the difference between the current value of your property and the remaining debt you owe on your home loan.
You can increase your available equity by reducing the amount you owe on the house (like making additional reapyments) which gives you access to borrow against a larger portion of the property. An increase in your property value can also free up more equity for your renovation. After a 25% increase in the value of the average Australian home over the COVID years, you may be surprised at the equity you have available.
Usually your lender will give you access to about 80% of the property value in equity. For example, if 80% of your property value is $500,000 and you owe $100,000, you will have access to $400,000 of home equity. However, there are costs to accessing equity, so it's best to speak to us first! We could also look at refinancing your loan or consolidating any other debts at the same time.
Option 4: Apply for a new personal loan
Personal loans are commonly used for renovations (or other fun things like travel) and they usually have a shorter loan term of 5-7 years. Because the loan term is much shorter than your average home loan, personal loans can come with higher interest rates, but nowhere near as high as credit cards, which makes them well suited to those special projects.
And, because you are assessed based on your credit risk and experience, the turn around time for approval is usually much faster than that of the average mortgage.
Option 5: Apply for a construction loan
A construction loan is a new loan that's designed for any construction projects in mind, whether it's a small extension or a complete knock-down and rebuild. A construction loan is designed to mirror the stages of a build, which means you can drawdown on the loan amount as the payments are due.
This can save you money over the life of the loan, as you only pay interest on the funds you have used, rather than the full amount. They can typically have a shorter term, higher interest rates and strict eligibility requirements. You will also need detailed documentation like council approvals, building plans and more.
It's important to get expert advice
As you can see, there are lots of different options for financing your renovation, so it's important to get expert advice when making the decision. Our team at Mortgage Choice in South Melbourne will look at your current home loan and your renovation plans to see what options will be best suited to you.
