No matter how big or small your project, you may need to borrow funds to finance your home renovations. Depending on your goals, there are a few different options for borrowing to undertake renovations.
Which option is the most suitable for you will depend on the size of the project, how much you need to borrow and your circumstances which may affect your funding options and loan capacity.
FUNDING YOUR RENOVATIONS
Understanding your options in advance, especially if it is a big project, can help you determine how much you have to spend so you can stick within your budget.
Using Equity In Your Home
Equity is the difference between the bank’s valuation of your house and the amount you owe on the loan. Equity goes up as your loan balance is reduced, or as the home value rises over time.
By using equity, your loan is kept in one place and is easy to manage. However, you should make sure you’re comfortable with any changes to your loan repayments before you decide to increase your home loan amount, as well as any potential fees and charges associated with the change.
Another important factor to be aware of is that you may have equity of $50,000 in your home, but your lender may not be willing to lend that amount to you. So it is important to find out how much you can access in equity before making any commitments.
Refinance your Home Loan
Refinancing might be suitable if you are looking to change from one lender to another for better rates, extras or switching your interest schedule from fixed to variable.
Refinancing could also be a means for debt consolidation. That is, use your home loan to pay off the debts on your credit card, personal loans and renovations. These debts don’t disappear, but by rolling them under your mortgage you may find saving in the lower interest rate of your mortgage compared to the interest as separate small loans.
If you are looking into your options, it is an excellent opportunity to chat with a broker to fully understand your options, additional costs and the time frame to finance your renovations.
Redraw from your home loan
Redrawing depends on your loan terms and how much you have available to redraw. Not all loans have a redraw facility. So if you don’t have this already set-up it’s unlikely you can access your redraw.
Generally speaking, the amount you can redraw is the amount you paid above minimal repayments. These surplus funds can be paid on the loan to decrease your interest until you need to draw on them.
A redraw allows the flexibility of lowering your interest by making more than the minimum savings, whilst having the ability to access these additional funds if you need them at a later date, such as to do some planned renovations.
If your loan requirements to complete your renovations are small, a personal loan may be suitable. Depending on the size of your savings, you may not need to borrow a lot of money to complete your renovations.
On the balance of time and cost to access the funds, restructuring or increasing your home loan or taking out a construction loan may not be the most feasible option.
You may consider a personal loan for a short amount you can pay off in a few years, as the loan term for personal loans tends to be shorter.
Personal Loans can be secured or unsecured. A secured loan means that you use an asset, such as a car, for the loan’s security. In this example, if you cannot repay the loan, the lender can repossess your vehicle to cover the loan.
This loan may take longer to process due to checks on the value of the asset you are using as security. However, the interest rates are typically lower than an unsecured loan because you are offering security.
An unsecured loan can be faster to set up as it does not require security. The amount you can borrow may be lower than a secured loan, and the interest may be higher.
A building and construction loan may be an option if you have decided to do extensive renovations and remodeling. With a construction loan, you receive your loan in increments.
Essentially, it is designed to release funds to pay your invoices as they come in. The benefit of this is that you make payments as the work is completed, which can help with cash flow.
Use Your Savings
If you have the funds on hand, using your savings will save you from paying interest in the future. You may want to use your savings and secure financing or use credit to top up the shortfall.
Credit cards offer a fast and convenient option to access additional funds, such as putting down a deposit on services or goods you want to secure, or purchasing small one-off items. But be aware that the interest can be high. Have a plan on how you will make the repayments, and a budget of how much you can really afford before you use a credit card.
If you would like to discuss your options or purchase a property that you intend to renovate in the future, have a chat with our team to walk you through your loan options.
Like any investment, it pays to do your research when purchasing a property, even if it is your future home. We can help you when you’re ready to start looking at rates, loan options and putting together a budget that suits your financial goals.
Terms are subject to approved persons only. This information is true and correct as of 25/12/2021. All of the content above is general in nature and may not suit your personal needs, situation objective & goals.
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