Borrowing Money For Renovations
The popularity of television shows such as The Block and House Rules continue to prove how popular home renovation is in Australia.
Although the idea of renovating the family home is very attractive to many Australians, finding the money required for a renovation isn’t always easy. One solution is to borrow the money.
There are a number of different ways you can borrow money for home improvements, and in today’s guide we will cover a couple of the more popular methods and what’s involved.
Home Equity Loan
Taking out a home equity loan is perhaps the most common way for Australians to borrow money for renovations.
A home equity loan works by borrowing money against the value of your home. For example if your home is worth $600,000 and your mortgage is $400,000, then you have $200,000 equity in your home. A bank generally won’t allow to you borrow the full value of your home however.
Without mortgage insurance, you will generally be able to borrow up to 80% of the value of the home. For a home worth $600,000 this would mean you could borrow $480,000. If you already have a mortgage of $400,000, this leaves $80,000 that you could borrow for renovations.
This is all good and well if the cost of your renovations does not exceed $80,000, but what if you want to do major renovations that will cost more than the equity you have available? This is where a construction loan can help.
A construction loan for renovation works in a very similar way to a conventional home equity loan, however under this type of loan the bank will take into account the finished value of the home when determining how much equity you have.
Carrying on from the previous example with the $600,000 home, let’s say you had planned a renovation that was going to cost $300,000 to complete. In this case the bank would organise a valuation of the home based on its completion value.
The valuation based on the completed renovations may be $900,000. The bank would still be willing to lend 80%, which would equate to total borrowings of $720,000. After taking away your existing home loan of $400,000, this would leave $320,000 available to borrow as a construction loan.
There are a few restrictions when renovating using a construction loan. The bank will not give you the full amount upfront, and will instead release the money in stages as the renovation progresses. This gives the bank added control and comfort in knowing that the money is increasing the value of your home and not being used for other purposes.
If you have recently purchased a home and do not have any equity available, another option is to use a personal loan to fund your renovations.
You won’t be able to borrow as much through a personal loan, with the loan amounts generally limited to around $30,000 or less depending on the bank. You will also find that the interest rate on a personal loan is much higher than a home equity loan.
Using a personal loan isn’t a preferred option due to the high interest rate in comparison to a home equity loan, however if you have minor renovations that need to be completed a personal loan can be a good option.
Although a very risky option, credit cards can also be used to fund small renovation projects. The risk is due to the temptation to use the card for other purposes and also to make the minimum repayments.
If you think you will be one who would be tempted, you should not choose this option. Although if you are confident you can stick to a plan and a budget, then a credit card could be the way to go.
Like personal loans, credit cards usually have low limits compared to home equity loans; however they are one of the easiest finance options to apply for and obtain.
The interest rates on credit cards are the highest out of all the options, although unlike a personal loan, there is no strict time limit on repaying, so technically you could reduce the monthly payments by increasing the time it will take to pay off the loan amount. Again this is risky, as if you leave it too long or make too little repayments, the interest amount on the loan will increase quickly.
There are many low fee credit cards available, you can compare credit cards on our site.
Is Borrowing The Right Strategy?
You should only borrow money for renovations if you believe the work will improve the value of the home or will result in an improved standard of living.
It is also important to ensure that your increased monthly repayments remain affordable, as there is no point increasing the value of your home if you can no longer afford the repayments.