March 27, 2017
As a mortgage broker, one of the most common questions we are asked by potential property buyers and home owners is how to finance property renovations.
Over the last 12 months, there has been a steady increase in the amount of home owners who wish to renovate their property.
According to Mortgage Choice's latest Happy As Index, 47% of Australians with a property are planning to renovate their home within the next 12 months - up from 36% the year before.
Of course this uplift in the number of people wishing to renovate their property is largely unsurprising given the increasing popularity of renovation television shows.
Further, renovating is a great way to make your old home feel brand new and significantly improve the resale value of your home. But while there are benefits associated with property renovation, it is not something that should be taken lightly.
If you are considering renovating your home in the near future, it is important to create a plan of attack. What room/s do you plan to renovate and how will you finance your renovations?
Once you work out what you need the extra finance for, it will be easier to determine how much money you need to borrow, and, in turn, which finance solution is the best for you.
At the end of the day, some renovations will cost more than others. According to the latest Happy As Index, one third of respondents said they would look to renovate their kitchen first, while a further 32.5% said they would make the bathroom a point of interest.
And while a freshly renovated kitchen or bathroom is likely to lift the resale value of a property far more than a refurbished lounge room or bedroom, these renovations can prove to be quite costly.
Then the next question becomes: how will you finance these renovations? Luckily, there are a few ways to easily finance your planned renovations.
1. Line of credit
A line of credit or home equity loan is a loan against the value of your property which can be used for renovations. One of the best things about a line of credit is that it gives you the freedom to spend the money as you wish - you can spend the loan in one hit or a little bit at a time. For this type of loan, interest is calculated on the outstanding balance of the loan, not the whole loan amount. It is important to note that the interest rate on this type of loan can be higher than the average mortgage rate.
Alternatively, you may be able to fund your renovations through your offset account. An offset account is an account that operates in conjunction with your home loan. The balance of your funds in your offset account is deducted from your outstanding home loan balance, reducing the interest you pay on your loan. So not only does your spare cash located in your offset account help you to reduce the amount of interest you need to pay on your home loan, but you can access the funds in your offset account at any time through ATMs, EFTPOS or online banking.
If you are ahead on your mortgage repayments and you have a redraw facility associated with your home loan, you might be able to redraw from your current loan to finance your renovations. It is worth noting that there may be a fee attached to redrawing money from your loan, so make sure you do your due diligence and determine whether this is right option for you and your needs before you commit to it.
Another way you can fund your renovations is through refinancing. By refinancing your mortgage, you should be able to borrow more money which can then help you fund your renovations. And, with interest rates low and Australia's lenders proving they are hungry for business at the moment, refinancing may be the right solution for your needs. Through refinancing, you may also find that you are not only able to fund your renovations, but reduce your current mortgage interest rate. At present, there are a lot of competitive rates available, especially in the fixed rate arena.
5. Construction loan
If your planned renovations are significant, it may worth considering a construction or building loan. A construction loan works in a similar way to a home equity loan except that your lender will not release the full loan amount to you upfront, rather they will release it to you in stages as the renovation progresses.
6. Personal loan/credit card
On the flipside, if the renovations you have planned are quite minor, then you may find it easier to take out a personal loan or use your credit card for the proposed refurbishments. Of course it is important to remember that the interest rates charged on credit cards and personal loans are higher than the average mortgage interest rate.
Before you decide how to finance your home renovations, it's important to chat to a professional first. As your local Joondalup & Butler mortgage brokers, we can help you to identify which financial solution is best for your needs - both now and in the future.
Contact our team today on (08) 9485 0090 to discuss your home renovation plans and finance needs.
Dennis Aplin, Your Local Joondalup & Butler Mortgage Broker
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