Five Ways to Fund a Renovation
Five Ways to Fund a Renovation
Are you considering transforming your home to create the style of living that matches your life today, however, lack the funds to support your makeover?
Here are 5 ways to achieve home renovation finance that could help turn your dream into reality.
Equity Release / Top Up Home Loan
This is probably the most common way people borrow money when they want to renovate. It involves borrowing against the current value of your home before any value-adding renovations and in most cases allows you to obtain the funds upfront.
You won’t be able to borrow the full value of your home but, without mortgage insurance, you can usually borrow up to 80 per cent of its value if you own it outright.
One potential problem is that the cost of your renovations may be higher than the equity you have available. So, consider your costs to establish if this is a viable option for you because if you run out of funds mid-construction, and if the property is then not in sound, lock up condition, you may have an issue obtaining extra funds down the track.
If you are planning to completely transform your home and undergo a major makeover, this may be a good option as you can spread the cost over a long period of time. You could even possibly borrow up to 90 per cent of the end value of your home and take advantage of mortgage rates which tend to be lower than credit card and personal loan rates.
With a construction loan, the lender will assess the value of your home after the renovation based on the building plans and you can typically borrow against that value. You won’t be given the full loan amount upfront, usually in staggered amounts over a period of time. These are called ‘progress payments’ and are linked to a fixed price building contract which will be from your builder.
Line of credit
When you apply for a line of credit, you can establish a revolving credit line that you can access whenever you want to up to your approved limit. You only pay interest on the funds you use and, as you pay off your balance, you can re-borrow the unused funds without reapplying if that becomes necessary.
However, take care that you are not ‘in over your head’ in terms of serviceability. Make sure you can make repayments on the line of credit that will reduce the principle because your minimum repayment only pays the interest, it will not reduce the loan. Rates on this product are typically much higher than a construction loan or top up loan. This product feature is great if managed well however consider carefully as your limit will never change.
If you’re only making minor renovations – personal loans are usually capped at around $30,000, and might be suitable, however, interest rates on personal loans are higher than on home equity loans and payments need to be made usually over a maximum of seven years.
This option should only be considered if you want to undertake small renovation projects. The interest rates are usually much higher than on mortgages, however, for a very small project, that extra interest might total less than loan establishment fees.
One thing to always consider.
There are very few exceptions to the rule that your renovations should add more value to your home than they will cost to carry out. Think about how the money you spend on a renovation will increase the value of your property. For example, consider making changes that would appeal to the majority of potential buyers to help you sell your house faster and at a higher price.
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