April 5, 2018
Should you refinance your home to renovate? When you use the mortgage to cover the costs of your project, you may be able to save a lot of money with a low interest rate. The alternatives – taking out a personal loan or funding your renovation costs with a personal credit card, can make the overall expense of updating your home balloon as you’ll have to pay hundreds or thousands more in interest with a higher rate.
Let’s face it; home renovations aren’t cheap. A standard bathroom renovation can cost $45,000 or more. Want to upgrade your bathroom or master bedroom? You may be looking at up to $35,000 in renovation expenses.
Renovating can still be worth it. You’ll add value to your home, and you and your family will get to enjoy a more comfortable, modern living space. But, you want to finance your project with a loan that comes with the lowest rate possible. For most people, this means refinancing your mortgage to pay for your renovation.
Refinancing your home loan may enable you to get a better interest rate and enough money above that amount to renovate. This means more flexibility should your project run over budget.
But, you still want to be careful as refinancing itself comes with some risks.
Take a look at these considerations to make sure refinancing to renovate is a smart move for your financial situation and to make sure you are switching to the right type of loan.
Most lenders in Australia will provide loans up to 80% of the home’s loan-to-value ratio (LVR). Before refinancing, make sure you check if the value of your property has dropped. Property values are always moving. If your home isn’t worth as much as it was when you purchased it, you may not have enough equity to refinance for a renovation loan.
You can get even more money from some lenders, but you will need to get Lender’s Mortgage Insurance (LMI) with it, which will increase the cost of changing loans.
Some lenders will let you refinance your home for renovation purposes at a different value. Lenders will often base it on the value of the home after the work is completed, which will enable you to get more. Talk to your lender to find out what options you have available to you.
A loan based on a line of credit is an excellent choice for a renovation. The amount of money is based on your equity. You’ll have the option to borrow only as much as you need and you pay interest only on the amount you actually use. There is a period where you can draw out the money as needed, and when that has ended, you make the payments on it.
This type of loan offers a lot of flexibility. For example, if the costs of completing your renovation turn out to be more than you had budgeted for, with a line of credit, you can simply draw down more funds as needed up to your limit.
Line of credit loans are more suitable for small renovation projects, like a modest living room upgrade, installing a laundry room, or building a deck in your outdoor area. These renovations usually cost less than a major bathroom or kitchen remodel. For the big projects, you may be better off refinancing through a construction loan.
When you are looking into renovating your home, you may want to consider a couple of other options to finance your renovation project. In addition to the possibility of refinancing to a line of credit loan or for a larger amount, you may also be able to:
Get a construction loan. These loans are available just for construction or renovating. Valuations will be necessary throughout the process. This type of loan is also available for those without much equity.
Extend your current mortgage. Getting the money you need for renovating your home may be less expensive this way. By extending your mortgage, you can lower your repayments, freeing up more of your disposable income to pay for your renovation. This method will enable you to avoid some of the costs of refinancing.
Before getting a renovation loan, it is important to understand all the details. You want to be sure of:
- The approximate cost (most renovations are at least $20,000). Don’t forget the cost of the design, materials, licences, fees, and labour costs
- Whether or not it will add value to your home, and how much
- If you can sell the home for the new value (avoid over-capitalising it)
- How long the work will take
- The total cost of refinancing the loan
Remember that when you refinance for renovations, you are apt to need a valuation before and after the project. Also, the money for the project may need to be accounted for before your contractor will begin work, and you probably will have a limited time to complete the work.
But, as long as you plan well and get the right type of loan for your project, refinancing can be ideal for improving your home and boosting its value.
Make your renovation dreams a reality; search and compare construction and line of credit loans.
Written by Refinancing.com.au
Refinancing.com.au is an end-to-end service that helps people refinance their home loan. We empower you to search for your home loan, and choose the process that suits you.
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