Funding your renovations

We Australians have always been fans of a good home renovation, and the popularity in recent years of TV programs like “The Block” certainly hasn’t dampened that enthusiasm in any way. However, if you’re planning on undertaking a major revamp of your home, (and assuming you’ve taken the time to get some expert advice to ensure that you’re not overcapitalising your property), then the most common question most home owners tend to ask is “What’s the best way to pay for all the materials and the work?”

Depending on what kind of renovation you’re planning, you may need to plan for a substantial expense…and for most home owners that will mean borrowing the money. But there are different lending options to be considered, depending on how big a project you are considering, and the state of your existing home loan.

Home equity loans

Your equity is the measure of the value of your home, less what you owe on your home loan. If you’ve owned your current home for a number of years, the combination of your repayments reducing your home loan and increasing property values will probably mean that you have built up some equity in your property. Depending on how much equity you have built up, you may be able to arrange an Equity Loan to fund your renovations.

However, you should always chat to your lender first, as they hold the security over your home via your mortgage, and they will want to be confident that your renovations won’t negatively impact on their investment.

Construction loans

This form of finance tends to be associated with major renovations, such as a home extension or a complete internal transformation.

One advantage of this type of loan is that they often allow you to draw down funds at the time you need them, so you are not paying interest on the full amount until you need to. In fact, some Banks will allow you to only pay the interest (rather than the principal and interest) during the construction phase which can help with cash flow if you have to move out while the work takes place.

Short term credit

If your plans are less substantial, such as a change of appliances or a new coat of paint, then you might find that using your credit card is a viable alternative.

Whilst this can be a flexible solution for some people, it is important to remember that most credit cards attract a higher rate of interest if you don’t pay them off quickly, so make sure you do your sums carefully and know how long you will be borrowing the money before you make this decision.

Overall

One of the most difficult decisions for anyone thinking of renovating is whether the end result will justify the cost. As we mentioned earlier, it is important to ensure that you are not overcapitalising to the extent that your project will end up costing more than the increase in value to add to your property. So always seek experienced advice from someone who knows your local property market before you spend the money.

And, of course, if you are going to borrow money to fund your renovation, our advice is to always seek the help of an independent advisor before you commit to any loan.