Financing Your Home Renovation

Financing Your Home Renovation

Most owner-occupiers like the idea of improving their home with a renovation while also using it as an opportunity to create some equity at the same time.

One of the first and most important elements of a home renovation is to examine the budget and then consider how you’re going to pay for it.

Fortunately, there are some good options out there for homeowners.

Refinancing Your Home Loan

Refinancing your mortgage can be a powerful way to fund a renovation. This strategy involves replacing your existing mortgage with a new one, either with the same lender or a different one. 

In the process, homeowners can tap into their home equity, which is the difference between the property’s current market value and the outstanding balance on the mortgage. This allows you to access some of the equity in your home as cash, to fund the project.

One of the key advantages of refinancing is the possibility of securing a loan with a low interest rate. Typically your mortgage will be one of the lowest interest rates available because you are using the security of real estate to back it. 

You also have the possibility of extending the loan term to reduce your repayments, however, this could mean you pay more in interest in the long run.

Ideally, when you undertake your renovation, you will see the value of your property increase by more than the cost of doing the work. That can leave you with the best of both worlds in that you’ve been able to use equity to find the project but you’ve also seen your property increase in value.

Top Up

Another way to get access to your funds without the need to refinance is to use a top-up loan. This works by giving you access to any additional equity, without refinancing the entire loan.

Top-ups are not available for all home loans and it will depend upon how much equity you have and your personal situation. It can also be useful if you have a fixed-rate loan that you don’t want to break.

Redraw Facility

For homeowners with variable-rate mortgages, the redraw facility can be another option for financing renovations. This home loan feature allows you to access any extra payments you’ve made towards your mortgage as cash. Essentially, it’s like having a savings account linked to your home loan.

The redraw facility offers flexibility, as you can withdraw funds whenever you need them as your renovation project progresses. However, it’s important to be aware of any limitations imposed by your lender, such as minimum withdrawal amounts or restrictions on the frequency of redraws. 

Additionally, accessing redraw funds might mean that your regular loan payments increase, so it’s crucial to budget accordingly. At the same time, not all home loan products have redraw facilities or you might not have ever made payments above the minimum, which means you will not have the ability to access any funds.

Personal Loans

For smaller renovation projects or quick upgrades, a personal loan can be a viable financing option. Unlike refinancing, which involves using your home equity as collateral, personal loans are unsecured loans that are based on your creditworthiness and personal circumstances.

Personal loans offer the advantage of quick access to funds, with minimal paperwork and streamlined approval processes. However, they typically come with higher interest rates compared to a mortgage, making them less cost-effective for larger renovation projects.

Before opting for a personal loan, it’s important to consider your repayment capacity and look at what you’re prepared to pay towards a renovation.

Credit Cards

Using a credit card to finance your home renovation should be approached with caution and realistically be a last resort. While it may seem convenient, credit card debt often carries high interest rates, making it an expensive option in the long run.

Credit cards may be suitable for minor renovation projects or for purchasing materials or white goods. However, relying on credit cards for extensive renovations can quickly put you in a bad position financially.

If you’re at the point of looking at using credit cards, it might be worth holding off on a renovation and finding ways to save the money.

The first thing you should do is speak with your mortgage broker in Melbourne to compare your choices and see what finance options you have based on your personal circumstances.

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