What is a Renovation Loan
Renovation Loans. How do they work? This is a complete guide to home renovation loans. In today’s video you’ll learn:
– How Renovation Loans Work
– How to Renovate on a Budget
– Different ways of financing your home renovation
– Dozens of Home Improvement Loan best practices
…And one advanced technique to get your renovation loan quicker
Pay out of your own pocket
Whether you have savings, hold investments you can cash in, have money built up in your home loan’s offset or redraw facility or have other funds you can access without incurring debt, using your own money to finance renovations may be more straightforward and less financially risky than borrowing.
If you’re considering accessing money via an offset or redraw facility, you may want to check the effect this could have on your loan in the long run. Money saved in an offset facility reduces the interest you’re liable to pay on top of the loan’s principal, so reducing the amount being offset against your home loan could mean you end up playing more overall and any time shaved off your loan term by the reduction in interest would be lost.
If you’re planning on using savings to finance your renovations, it may be worth checking that after you’ve withdrawn the amount required for your renovations, you’re still left with an ‘emergency fund’, e.g. enough left to deal with any unexpected expenses that could pop up, like an insurance excess or a car service.
Refinance your home loan
For those with enough equity built up in their home, refinancing the loan could be an option.
If you are able to borrow the money needed for the renovation based on your existing home equity then increasing your loan size and placing the renovation funds into a 100% offset account is a course of action that could be available to you, assuming your home loan has an offset facility. This would, generally speaking, prevent you from having to pay any interest on the additional amount until you use it. Another option could be a line of credit, which is designed to let you access funds as you need them and charges interest on the balance owing on your account.
In some respects, refinancing is a similar commitment and process to taking out a new home loan, so make sure you consider the implications it could have on your wider finances and, if you do decide to refinance, shop around for a competitive product.
Apply for a construction loan
If you’re embarking on a large renovation project and you don’t have enough equity in your property to borrow the amount you need against your mortgage, you could consider a construction loan.
A construction loan is typically based on the estimated final (post-renovation) value of your property, which allows you to withdraw whatever amount you need in order to pay the latest renovation-related invoice that has come in. In some cases, these loans can be interest-only for a period of time, in which case they will generally revert to principal and interest at a future date.
Take out a personal loan
A personal loan could be another option for funding your renovations. Personal loans typically allow you to borrow up to around $50,000 (some lenders may have higher limits) and generally come in two forms, either secured or unsecured. Interest rates can vary widely depending on the product, the chosen terms, and your credit history.
Secured finance will, generally speaking, be cheaper than unsecured finance. Personal loans are no different for the most part, and typically offer a range of options regarding assets you can secure the loan against, such as term deposits, vehicles, and property.
It could be worth bearing in mind that an interest rate which could be considered low for a personal loan product – some of the lowest personal loan interest rates on Canstar’s databases currently hover around 6% p.a. – would still be relatively high when compared against a similarly competitive home loan interest rate, which could be closer to 3-3.5% p.a. With this in mind, you may want to consider the pros and cons of a separate personal loan vs refinancing your home loan.
If your renovation is likely to involve smaller, more regular expenses, there are some other types of finance that may be appropriate. For example, you could consider a credit card or overdraft facility.
Note that these options typically come with higher interest rates and fees than other types of finance so may not be suitable for all renovations, particularly if you think you might not be able to repay the funds quickly. ASIC’s MoneySmart website warns, for example, that while overdrafts may seem handy “high fees can make a dent in your wallet. Explore other credit options before you get an overdraft. There may be products that are cheaper and more suited to your circumstances.”