Thinking of renovating? It can be cheaper than buying a new house, especially when you factor in stamp duty, real estate fees, etc. People may also be emotionally attached to their current home or unable to afford the style of home they are looking for in their desired suburbs.
In 2016, 8.4 million Australians did some kind of renovations. Of those, almost 3 million did serious renovations (think plumbing or electrical) and another 3 million of us did minor decorative work (replacing carpets or curtains).
All this comes at a cost, over $7.2 billion in the 2014/2015 financial year alone. Add in the never-ending mess and the unexpected expenses which inevitably crop up, renovating is one of the most stressful experiences a homeowner can go through.
The biggest obstacle most people run into is finance, but there are several ways to finance a renovation.
Cash – Most of us don’t have a spare $50k just laying around, but we can usually pull enough together to buy new curtains or buy a new basin for the vanity. Using cash avoids the additional cost of interest so is a good option where you can afford it.
Personal loan/credit card – They may be easy to access and use, but the higher interest rates associated with credit cards and personal loans mean this is usually only an option for smaller/less expensive renovation expenses. Ideally, if you are considering putting it on the credit card, you should try and save for it and pay in cash instead.
Refinance – This is the most straightforward way to finance larger renovations. Essentially, you arrange for your home to be valued and then borrow against the value. Wherever possible, try and borrow less than 80% of the value of your home as this allows you to avoid paying lenders’ mortgage insurance.
Renovation loan – The process for a renovation loan is more complex than the other options but it may be useful in circumstances where you don’t have a lot of equity in your home. Basically, you get detailed quotes from your builder and the bank arranges for your home to be valued on a “completed basis”. This means they try and determine what your home will be worth once all the renovations are finished. Once a value has been determined, your borrowing capacity is calculated based on all the usual factors combined with that estimated value.
The most important thing to keep in mind when borrowing to renovate is what you want to achieve. If you are renovating for profit, it is important not to overcapitalise, whereas if you are renovating your home and you intend to stay there for another 20 years, it is probably a good idea to consider doing as much as possible now to minimise the need for future renovation.