One of the most surprising side effects of lockdowns has been watching social media flood with images of people showing off their small home reno skills. Clever storage hacks, cute kitchen makeovers and beautiful garden transformations were shared with abandon. People were even finding the time to work through their long neglected to-do list.
And let’s not forget all those amazing home renovation TV shows, convincing you it’s easier to renovate than move.
With people spending more time at home, it’s now harder to ignore your home’s lack of space. But when it’s time to think about major home renovations, how do you go about financing?
Well the good news is, you’ve got lots of options. And while not all will be right for you, and you should expect extra fees and charges, our guide covering off some of the most common financing options is a great place to start.
If you’ve built up enough equity in your home, refinancing your existing home loan is one way to pull together the funds needed to finance major home renovations. When you refinance, you’re leveraging your current equity to borrow the money you need. It’s also a great opportunity to renegotiate your current interest rate and home loan terms.
Talk to your current lender to see what they can offer. If you think you can find a better deal or you want to refinance with another lender, talk to your mortgage or financial advisor.
What's home equity?
The equity you hold in your home is the difference between the value of the property and what you still have to pay on your mortgage. For example, if your home is valued at $800,000 and your mortgage is $500,000, you have $300,000 home equity. Your equity increases as you pay down your mortgage and also as the value of your home increases.
But be aware that, should the value of your home fall, your equity will decrease as well.
Fund the renovations yourself
You can use your own money in a few different ways.
Savings – you save up the amount of money you need to fund the renovations. Once the renos are complete, the value of your property will go up and, with no additional debt, your home equity will be boosted.
Offset and redraw – if you have either of these features already on your home loan, you’re almost ready to go! While the money you deposit into these facilities is still technically yours to spend, you might want to look into how using this extra cash will affect your mortgage. With interest rates still so low, you may be better off financially if you refinance.
Home equity - loan
Also sometimes known as a ‘cash-out’ home loan, it’s the most common way Australians finance their major renovations. While you’re borrowing against your current home equity, you can’t borrow against the full amount, with most borrowers only lending up to 80 percent of the pre-renovation value of your home.
These loans are favourites because you can access a large sum of money without having to sell your home. And they’re easier to qualify for as they’re much less of a risk for the lender.
Home equity - line of credit
Setting up a line of credit works best for on-going or long term renovations. A line of credit means even though you have a limit, you access funds only as you need them. Think of it like a credit card but, with your home as security, you’ll get a much better interest rate. However, as with credit cards, you need to ensure you don’t overextend and find you can’t service your loan.
Building or construction loan
Much like a home equity loan, except the lender will take into consideration the value of your home once the major renovations are complete. You don’t get the money upfront, instead it’s paid in spaced out amounts over the course of the construction period. This type of loan saves you money as you’re only paying interest on the progress payments and not the entire loan amount.
Only consider a personal loan when making smaller home renovations. Interest rates will be higher so consider your other loan options first.
Overcapitalising (and how to avoid it)
While it’s tempting to want to create the home of your dreams, you need to be careful you don’t overcapitalise. Overcapitalising is when you spend money on your home that doesn’t increase its value. Other than to make your home more attractive and comfortable, you also need to consider if your renovations are actually going to add value to your property.
Not sure how much value your reno’s will add to your property’s value? Call in a local real estate agent for a valuation (and quick reality check if your budget is skyrocketing).