Borrowing to renovate

Borrowing to renovate

Popular home renovation shows, such as The Block, are inspiring those with home loans to look into carrying out their own home transformations, but not everyone has a Channel Nine budget to do so.

According to the HIA’s 2013/14 Kitchen and Bathrooms Report, the overall value of bathroom renovations increased in the 2012/13 year to $13,986 per room, up from the average value of $15,122. Meanwhile, some interesting figures were presented regarding kitchen renovations, with almost three-quarters (74 percent) being completed on those between 11 and 20 years old.

Whether Australians are extending their kitchen, revitalising the bathroom or adding an additional bedroom, there are numerous ways to improve a home’s liveability — and potentially its value. And for those with the dream but not the funds, there are many avenues available that will enable you to borrow to renovate.

Are you ready to renovate?

Australians are renovation fans, not least because it means they can stay put without suffering from limited space. Adding an extra room or extending a key living area by knocking down a wall can make an already good home even better to live in. 

Depending on the project you’ve got in mind, renovations can cost a fair bit. Rather than topping up your savings account year-in, year-out until you’ve got sufficient funds to freshen up your kitchen or transform your backyard, consider borrowing to renovate. Provided you don’t overcapitalise, it can be money worth spending, particularly if it has the effect of raising your home’s value.

Take out a home equity loan

If you’ve been paying off your loan for some time, you may have built up sufficient equity in your property to renovate. Equity is the value of an asset less any money owing on it.

You could tap into this equity, taking out an equity loan to fund your renovation project. You may need to confirm with your lender the kind of renovations you plan to undertake — given they hold a security over your home, they’ll need to be confident the renovations you complete don’t negatively impact this legal interest.

Secure a construction loan

A construction loan is suitable when you want to make big changes to your home, such as completing a kitchen makeover or extending your sunroom.

It’s a good option if you’re concerned about interest adding up, because you can draw down funds as you need them. For instance, you might complete key structural work first, then move onto fitting appliances and interior decorating.

Better yet, some lenders will allow you to pay only interest (rather than interest and principal) while construction takes place. This flexibility makes construction loans favourable with many homeowners — just make sure you don’t borrow beyond your means if you go down this route!

Pull out the plastic

If you want to make low-cost, superficial changes — such as painting your living areas and replacing minor fittings — using your credit card could be preferable.

But there’s one catch: If you don’t make the required repayments in time, you could face hefty interest. Be sure to budget carefully before paying for equipment, tools or labour on your credit card.

Have a chat with your lender about the best approach for your situation. Depending on the degree of structural work required and necessary funds, they’ll be able to provide you with sound advice. Don’t hesitate to shop around to find the best product for your needs, either!

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Learn more about home loans

What is a building in course of erection loan?

Also known as a construction home loan, a building in course of erection (BICOE) loan loan allows you to draw down funds as a building project advances in order to pay the builders. This option is available on selected variable rate loans.

What is the amortisation period?

Popularly known as the loan term, the amortisation period is the time over which the borrower must pay back both the loan’s principal and interest. It is usually determined during the application approval process.

What is a specialist lender?

Specialist lenders, also known as non-conforming lenders, are lenders that offer mortgages to ‘non-vanilla’ borrowers who struggle to get finance at mainstream banks.

That includes people with bad credit, as well as borrowers who are self-employed, in casual employment or are new to Australia.

Specialist lenders take a much more flexible approach to assessing mortgage applications than mainstream banks.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

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The money you pay back to your lender at regular intervals. 

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Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

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How much you intend to borrow. 

What is a construction loan?

A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.

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Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.