Top five risks of renovating

Top five risks of renovating

Whether you blame it on the popularity of home improvement TV shows such as The Block or high property prices that prompt people to renovate their existing homes rather than buy something bigger, we are a nation of renovators. In fact, Australians spent $6.35 billion on renovations in 2012, according to the Australian Bureau of Statistics.

If you are considering improving your home or are keen to get into the renovate-and-sell game, there are five risks you should keep in mind.

Budget blowout

Anyone who’s watched the ultimate home renovation show Grand Designs will know that building and renos rarely come in on budget. To avoid a budget blowout, Sydney-based Archengine Architects recommends engaging a quantity surveyor to estimate the cost of construction before lodging a development application with the local council – this will ensure you don’t end up with approval for a renovation you can’t afford. The quantity surveyor’s fee of $5000 could save you tens of thousands later on.

Overcapitalising

This is the biggest risk of renovating and it occurs when you spend more on the renovations than the profit those improvements could be expected to bring if you were to sell the home. If you are planning to live in the home “forever”, this may not be a problem, although it’s worth remembering that you never know when you may have to unexpectedly sell.

Real estate agent Mark Dawes, director of Richardson & Wrench Alexandria Waterloo, advises researching property prices in your area and not spending more on the total cost than buyers in your suburb would be willing to pay for. “You have to tailor your spend to your market and adjust accordingly,” Dawes says.

Devaluing your property

The point of any renovation is to improve your home and therefore add value when it comes time to sell. Once again, unless you intend to live in your home forever you must be careful that any renovation you undertake is finished to the utmost quality and has wide appeal.

Over-personalising a renovation can actually devalue your property. “You have to be careful not to personalise it too much,” Dawes says. “You’ll be appealing to a small part of the market of people who have the same taste as you. To achieve a premium price, you need to have competition and to create competition you need to appeal to the maximum number of people.”

In one case Dawes is aware of, an owner in an inner city suburb of Sydney had to reduce her asking price by $150,000 after her home spent 14 months on the market with potential home buyers put off by its ornate and ostentatious renovation. “She would have sold for $150,000 more had she gone for a simple, contemporary renovation,” Dawes adds.

Not getting the right advice

“Another trap is that people go into a renovation thinking they know what they’re doing but soon realising it’s not that simple,” Dawes says. An architect familiar with local council regulations – such as heritage restrictions, for example – and a builder can tell what to expect before you embark on the reno process.

“You need to get the relevant experts to tell you what you’re in for,” Dawes adds. “You need to do your homework to avoid surprises.”

Sourcing reliable builders is also of the utmost importance. “Don’t necessarily go for the cheapest quote – go for the person most capable and look at the quality of their work before you choose them,” Dawes says.

Shoddy work can end up costing you more than you bargained for.

Risking your health

If you’re planning a DIY job on your renovations, the budget won’t be the only thing to worry about. A survey by Sydney’s St Vincent’s Hospital last year found that 61 percent of respondents who had recently completed their own renovations had been exposed to asbestos. Asbestos was used in products such as carpet underlay, walls and floor tiles in homes constructed before 1987.

Electrical wiring, falling fragments of wall and potential trips and slips are also risks associated with renovations, so taking all necessary safety precautions is crucial.

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Learn more about home loans

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Are bad credit home loans dangerous?

Bad credit home loans can be dangerous if the borrower signs up for a loan they’ll struggle to repay. This might occur if the borrower takes out a mortgage at the limit of their financial capacity, especially if they have some combination of a low income, an insecure job and poor savings habits.

Bad credit home loans can also be dangerous if the borrower buys a home in a stagnant or falling market – because if the home has to be sold, they might be left with ‘negative equity’ (where the home is worth less than the mortgage).

That said, bad credit home loans can work out well if the borrower is able to repay the mortgage – for example, if they borrow conservatively, have a decent income, a secure job and good savings habits. Another good sign is if the borrower buys a property in a market that is likely to rise over the long term.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

Mortgage Calculator, Deposit

The proportion you have already saved to go towards your home. 

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success

Will I be paying two mortgages at once when I refinance?

No, given the way the loan and title transfer works, you will not have to pay two mortgages at the one time. You will make your last monthly repayment on loan number one and then the following month you will start paying off loan number two.