August 3, 2017
Refinancing for a home renovation is a smart financial move, which is why a lot of Australians are doing it. You can use your low mortgage interest rate to cover your renovation costs instead of having to take out another loan. Once you renovate, you’ll have increased the value of your property, making it prime for selling at a great price or improving the quality of your own living space.
Here’s what you need to know before you refinance to make the most out of your experience.
The most important number you need to have established before you apply to refinance is your renovation budget. How much do you expect to spend on your home improvement project? Get an estimate from multiple builders to give you a better idea of how much it will cost. Then, overestimate the cost, just to be safe.
The worst mistake you can make when refinancing is to underestimate your renovation budget. If you refinance for $30,000 but then realise it is going to cost close to $50,000 to complete the renovation, you’re going to have to refinance again to secure the extra funds or take out another loan. Either way, this is going to cost you more money (and time) to apply for yet another loan. It also may be difficult. Banks will not like it if you try to refinance a second time because you’re going over your predicted budget.
When you refinance, what type of loan should you get for your property renovation?
One option is to get a construction loan. Construction loans can be less expensive because you’ll only pay interest on the money you spend, not your maximum loan amount. You can’t use a construction loan for small home improvement. But, for structural changes, such as adding a new room, you can. You’ll be able to take out more money overall with this type of loan. Keep in mind, you will need to get council approval and a fixed price-building contract in order before your loan will be approved.
If you are making cosmetic upgrades, such as updating your kitchen and bathroom or painting your home, you’ll want to take out a line of credit loan. In this case, you can borrow against the built up equity in your home. With a line of credit home loan, however, you will have access to cash from your equity for your renovation, as well as to cover other expenses. Make sure you are a responsible borrower. If you keep taking out more of your credit, you’ll take that much longer to pay off your home loan.
It’s a good idea to research your options. Compare different line of credit and construction loan products. Evaluate how much it’s going to cost you to refinance and to increase your debt. Talk to a broker to find out what types of loans you may be eligible for. With a clear idea of the overall cost of refinancing – and of your renovation project – you’ll be able to make a smart choice about how much you want to refinance for.
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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