Considering transforming your home from ‘banal’ to ‘brilliant’, but lack the funds to support your makeover? Never fear, we’ve rounded up five home renovation finance options that could help turn your dream into reality.
1. Equity Release / Top Up Home Loan
An equity release or top up loan is one of the most common ways 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.
If you own your home outright, you can usually borrow up to 80% of its value.
If you have a mortgage on your home, the amount you can borrow is usually the difference between the balance of the loan and 80% of the value of the property.
For example, if your home is valued at $500,000 and your loan balance is $300,000, you could borrow $100,000 – making the total loan amount $400,000.
One potential problem is that the cost of your renovations may be higher than the equity you have available. If you run out of funds mid-construction, and the property is not in sound condition, you may have difficulty obtaining extra funds later.
2. Construction Loan
If you’re planning to completely transform your home and undergo a major makeover, a construction loan may be a good option as you can spread the cost over a long period of time.
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 may be able to borrow up to 90% of the end value of your home and take advantage of mortgage interest rates, which tend to be lower than credit card and personal loan rates.
You won’t be given the full loan amount upfront, but usually in staggered amounts over time. These are called progress payments and are linked to a fixed-price building contract with your builder.
3. Line of Credit
A line of credit allows you to establish a revolving credit facility that you can access whenever you need, 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 necessary.
However, care must be taken not to get in over your head in terms of serviceability. Make sure you can make repayments that reduce the principal because minimum repayments may only cover the interest.
Interest rates on this type of product are typically much higher than a construction loan or equity release loan.
4. Personal Loan
A personal loan may be a good option if you’re only making minor renovations.
Personal loans are usually capped at around $60,000, but interest rates are generally higher than home equity loans and repayments are often required over a shorter period.
5. Credit Cards
Using credit cards to fund renovations should only be considered for very small projects.
Interest rates are usually much higher on credit cards than mortgages, but for smaller renovations the additional interest may still cost less than loan establishment fees.
Ensure Your Renovations Add Value
There are very few exceptions to the rule that your renovations should add more value to your home than they cost to complete.
Think carefully about how the money you spend on renovations will increase the value of your property. Consider making changes that appeal to a wide range of buyers to help your home sell faster and potentially at a higher price.
