Renovating your home can be fraught at the best of times but, for first-time homebuyers, taking out a renovation loan can heighten the risk you could accidentally devalue your property or blow out your borrowing budget.
Lenders may not agree to let you borrow money for renovation unless you have a valid reason. Some of the reasons lenders may accept could be:
Renovating to increase the value of your property
Renovation may not be an immediate concern for you as a first home buyer unless you buy an old home that needs immediate work or you wish to flip the property. Not all renovations mean a higher sale price though, so it’s important to make sure that the value addition is more than the amount you spend on renovations.
As a rule of thumb, no more than 5-10 per cent of a home’s original value is often spent on renovations.
Before planning renovations or applying for a renovation loan, it may be worth checking the home prices in your neighbourhood to get a realistic idea of the property value. You could also consult a local real estate agent to understand which renovations might appeal to other homebuyers.
Renovating to accommodate lifestyle changes
Sometimes, you move in to your first home and find that you need to add a bathroom or extend a bedroom to create an office or redo your kitchen. Such renovations can turn into a considerable expense, especially if you need to make structural changes. You may need to plan your renovation budget before approaching a lender. Remember to add a buffer as renovation costs can shoot up beyond expectations.
Renovating to take care of pest infestation
You may discover on moving into your new house that the property and premises are infested with pests, such as termites and rodents. You should get a pest inspection done to understand the kind of repairs that may be necessary and budget your renovations accordingly.
If you need to apply for a renovation loan, you should also include additional expenses like:
- Temporary accommodation costs
- Cost of hiring dependable contractors and tradespersons
- Costs incurred in lodging a Development Application (DA) and getting local council approval
What kind of renovation loans can a first home buyer get?
As a first home buyer, it’s likely you haven’t had your home loan for long. If that’s the case, you can check whether the home loan terms include use of an offset account or a redraw facility. You will need to have deposited money in the offset account to borrow it for covering the home renovation. Also, redrawing from your mortgage could affect your repayment schedule and cost you more over the long run.
Alternatively, you could check if the lender can top up or increase your loan amount and use the extra amount for renovation. This too will mean you have to repay a higher amount.
You could also apply to your home loan lender for a line of credit. Sometimes the equity in your home can be used to unlock additional borrowing money, but if you have just bought your home you may not have had time to build up much equity.
If these options are not available, you could consider taking out a home improvement loan which is a form of personal loan. Keep in mind the interest rate on a personal loan can be significantly higher than that for a home loan
What are my options if I don’t find renovation mortgages for first-time homebuyers?
If you aren’t finding a suitable renovation loan option, check if you can apply for government grants or interest-free loans. For example, some states in Australia offer incentives to homeowners who’ve installed solar panels on their property.
The Australian government’s HomeBuilder grant, which covers building a new home as well as renovating an existing home, offers $15,000 if the renovation contract is signed between January and March 2021. Consider finding out if you’re eligible to apply for this grant in your state or territory.