Overcapitalising – and 4 ways to avoid it

November 01, 2017
Beth Measday

Buying the worst home in the best street has long been a mantra for real estate success but be careful not to overcapitalise! The other mantra is ‘Location, location, location’ so if the location is right for you, renovating your home is a great way to get the home of your dreams. You can add rooms and reconfigure an awkward layout but of course that will cost money!

  1. For internal changes to your home such as a refreshed kitchen or bathroom, the lending institution will rely on the current value of your home. You therefore need to have enough equity in your home to redraw against it for the renovation work. For more major renovations involving structural changes, you will not only need council approval but also full plans by a licensed builder and a fixed price contract. The lending institution will then use these plans to determine the proposed new value of your home via an ‘off the plan’ valuation.
  2. A quick word about pools. While you may dream of jumping into your own pool on a very hot day, they are an expensive renovation project and lending institutions and valuers do not share your enthusiasm. They often under value the addition of a pool so, unless you have sufficient equity in your home, it may be better to make friends with someone who already has a pool!
  3. To do any major renovations, you will usually need a loan calculated against the renovated value of your home. To decide whether to approve that increased loan, you will not only need the income to service it, but the lending institution will also check that you are not overcapitalising. To do this they look at ‘comparable sales’ in your area. These are homes that have sold (not just on the market) with a similar configuration (eg the number of bedrooms, bathrooms, living spaces and land size) to your renovated home. If the cost of your renovations are going to put the proposed value of your home way above these comparable sales (ie it would be ‘overcapitalised’), the lending institution may not approve the loan.
  4. Do your research first. Before you go to the expense of employing a builder or architect, check out the comparable sales in your area. I can provide you with these. If your renovated home will be the most expensive by far in your area, you may need to look at other options.

If you are thinking of renovating your home, call me on 0403 577 287 for an ‘up front’ valuation to help with your decision. 

Posted in: Renovating

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