Considering transforming your home from ‘banal’ to ‘brilliant’, but lack the funds to support your makeover? Never fear, we’ve rounded up four home renovation finance options that could help turn your dream into reality.
Option 1: Equity Release
Equity release – or a home loan top up – is probably the most common way people borrow money when they want to renovate. It involves borrowing against the current value of your home (not the value after the renovations are done). In most cases, this approach allows you to obtain the funds upfront.
You won’t be able to borrow the full value of your home but you can usually borrow up to 80 per cent of its value (if you want to avoid lenders mortgage insurance). But remember you need to take into account any existing debt you have against the home.
For example, if your home is worth $700,000, you can potentially borrow up to $560,000 against the home. If you already had a home loan of $200,000, then that enables you to borrow an extra $360,000 for the renovation.
One potential problem is that the cost of your renovations may actually be higher than the equity you have available. If you run out of funds mid-construction, and if the property is then not in a sound, lock-up condition, you may have an issue obtaining extra funds down the track.
Option 2: Construction loan
If you’re planning to completely transform your home and undergo a major makeover, this may be a good option as you can spread the cost over a longer period of time. You could even possibly borrow up to 90 per cent of the end value of your home – that is the value once it’s renovated.
With a construction loan, the lender will assess the value of your home after the renovation based on the building plans. You won’t be given the full loan amount upfront, but usually in staggered amounts over a period of time. These are called ‘progress payments’ and are linked to a fixed price building contract which will be from your builder.
Option 3: Line of credit
Another option is to apply for a line of credit. This essentially gives you access to an approved amount of money that you can access whenever you want. You only pay interest on the funds you use and, as you pay off your balance, you can re-borrow the unused funds without reapplying.
However, care must be taken not to get in over your head in terms of being able to meet your repayments. If you only ever pay the minimum amount (that is, the interest), you will never pay off the principal. This product feature is great if managed well, but can also be a trap if not seriously considered as your limit will never change.
Option 4: Personal loan
If you’re only making minor renovations, you might be able to consider a personal loan which usually cap out at around $30,000. Remember though that interest rates on personal loans are higher than home loans and usually need to be paid off within no more than seven years.
A final tip
Generally speaking, you want to make sure that your renovations add more value to your home than they cost to carry out. Think about how the money you spend on a renovation will increase the value of your property.