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Refinancing a mortgage to pay for renovations

Refinancing a mortgage to pay for renovations

Whether you’re planning to knock down some walls or touch up your bathroom or kitchen, you may need to borrow some money to pay for the material and labour costs. One of the options is to refinance your home loan and free up some cash to pay for the renovations. 

Also called a cash-out refinance, this option lets you tap into your home equity by refinancing your home loan to increase your borrowing. The difference may be withdrawn in cash to pay for renovations or to meet other personal expenses. A few lenders also let you access the money as a flexible line of credit. Some borrowers may find this option better suited for long-term renovation projects, as it offers periodical payments when needed (up to the loan limit).

How to refinance a home loan for renovations

Your equity is the difference between the current value of your home and the outstanding amount on your mortgage. If you’ve been making regular mortgage repayments for a few years, and your property has increased in value since you purchased it, you may have built equity that can be leveraged to pay for a renovation project. 

With a cash-out refinance, you can use this equity to borrow up to 80 per cent of the current value of a property. You are also likely to get a more competitive interest rate than other financing options, like a personal loan. Besides, with interest rates being at an all-time low, refinancing to a lower rate could potentially save you in interest costs. 

Comparing home loans for refinancing from different lenders is one way to find a competitive deal to get more out of your mortgage. You may start by comparing similar home loan products online to see how your current interest rate stacks up against the market average. If you find your lender is charging you more than what they’re charging new customers for a similar product, you could call them up to negotiate a better rate and top-up your loan to avoid the costs and paperwork involved in switching lenders. If that doesn’t work out, you have the option of changing lenders to get access to a better rate and features. 

In either case, inform your lender about the requirement for extra renovation funds and how you plan to spend them. Different types of renovations are covered by different types of loans, and a lender might suggest another alternative more suitable for your requirements. For instance, if you need to do some major work like raising the roof, a construction loan may be worth considering. Or, if you’ve been making additional repayments on your home loan, redrawing some of these advance payments could help to finance a minor cosmetic renovation. 

If you aren’t sure about the financing option that’s best for you, discussing your requirement with a broker can help. A decent broker will help you evaluate your choices better and also try to negotiate a more favourable rate and terms with your lender.

What to keep in mind while refinancing your home loan for renovations

When planning a renovation project, it helps to be clear about what you’re doing and why you’re doing it to keep the costs under control. Discussing your plans with an expert will give you a ballpark figure for the project. It will also help you ascertain whether the modifications are likely to add any value to your home or not. For example, you might be considering some cosmetic changes to your bathroom without realising the extensive plumbing work it might entail. An expert will tell you about these costs in advance so you can plan your budget accordingly. 

Once you have an estimate, you may choose to apply with a lender to refinance your mortgage and increase how much you borrow to pay for the project. However, increasing your debt is likely to increase your monthly repayments. So make sure you have the capacity to repay the additional debt in the long run, or you might find yourself falling behind on your repayments. If you don’t want the monthly repayments to increase, you may choose to increase the loan term, but remember, this could increase the cost of the loan over the longer term as well.

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This article was reviewed by Kate Cowling before it was published as part of RateCity's Fact Check process.

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