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Fraction of 2019 renovations meet HomeBuilder spending threshold, survey finds

Fraction of 2019 renovations meet HomeBuilder spending threshold, survey finds

Only ten per cent of renovations cost more than $150,000 to complete last year, according to a new survey, providing some insight into the number of renovations that may be eligible for the government’s $680 million HomeBuilder scheme.

The Houzz and Home renovation trends survey, of 4500 people fielded before the COVID-19 pandemic, revealed the typical home renovation project cost $20,000, and generally consisted of three rooms.

It’s not known how the coronavirus will impact renovations

Nearly one in two (48 per cent) of homeowners planned on starting or continuing a renovation this year, but the data -- captured in February and March -- precedes the disruptive reality brought about by the pandemic. 

“Subsequent surveys have shown that four-in-five homeowners who were in the midst of a
project at the start of the pandemic were able to continue with renovations,” said Marine Sargsyan, a senior economist at Houzz. 

“Some homeowners have opted to delay certain elective renovations due to implications related to social contact, labour and material availability and personal discretionary spending.”

Ms Sargsyan said the projects could be put on the backburner until they can be carried out, “setting the stage for a renewed burst of activity following the pandemic”.

A $25,000 HomeBuilder grant, but there’s a catch

The Federal Government has launched a $680 million grant to help “the residential construction market by encouraging … new home builds and renovations”. A $25,000 grant may be available to eligible owner occupiers looking to build a new home or substantially renovate the existing home before the end of this year.

But there are a couple of catches, including that the renovation will have to be valued between $150,000 and $750,000.

Houzz and Home’s survey of 4500 people found just ten per cent spent $150,000 or more on their renovation last year.

Other criteria must be met as well to qualify for the HomeBuilder grant. This includes:

  • Individuals earning less than $125,000 per year, and couples earning less than $200,000 combined
  • The building of a new home cannot be on land worth more than $750,000
  • The value of a residential home being renovated can’t be more than $1.5m before construction

Securing $150,000 for a renovation

There are a few ways to ​help secure the funds for a renovation valued at $150,000 or more. 

The most obvious is saving the money, whether it is being banked in a savings account, or accumulating in an offset account of -- what is most commonly -- a variable rate mortgage.

Using the money repaid in an offset account could increase the balance owing on a loan, and may result in more interest being charged as it is being calculated on a larger sum.

Some loans have a redraw facility and this works in a similar way to an offset account. Extra repayments made to a loan can be redrawn to finance a renovation, but this too forgoes reduced interest charges. 

The final option is to shop around for another mortgage and refinance. It might be possible to find a mortgage with a cheaper interest rate and options that are more flexible, but keep in mind breaking a mortgage often results in exit fees.

What did people renovate and how much did it cost?

The most costly renovations were typically undertaken on kitchens, according to Houzz and Home’s survey, and cost about $15,000. They were followed by renovations to master bathrooms ($13,000) and to guest bathrooms ($10,000).

Four out of five renovations were paid by people dipping into their savings, while credit cards -- were used in one-in-five cases -- mostly by Gen Xers; people aged 41 to 55 years old.

Prep times generally took twice as long as the renovations themselves, the survey found. Construction time on average took from 2.4 to 5.7 months.

Professionals were commissioned to complete the renovations in 89 per cent of cases. Most commonly, these were electricians (60 per cent) and plumbers (45 per cent).

Who was spending?

Baby boomers, aged from 55 to 74 years old, accounted for nearly half -- 45 per cent -- of all of the renovations in 2019. About 53 per cent of them intended to live in their homes for a decade.

“Project scope and spend have remained stable and we’re seeing Baby Boomers continue to bring consistency to the market as they pursue projects that will allow them to age in place,” said economist Sargsyan.

“Following significant growth in home renovation activity over the past few years, we’re seeing
the market settle somewhat in terms of activity.”

Baby Boomers and Gen Xers generally made the decision to start a home renovation project because they finally had the time (at 39 and 30 per cent, respectively) and the money (at 42 and 39 per cent, respectively).

Millennials, aged from 23 to 38, chose to renovate in 38 per cent of cases because they wanted to customise a home they recently bought.

Related

How Australians are spending their COVID-19 stimulus payments: ABS
Renovate or sell? The big question
Owner builder home loans

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Fact Checked -

This article was reviewed by Finance Writer Alison Cheung before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

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.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

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.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

How do I apply for a home improvement loan?

When you want to renovate your home, you may need to take out a loan to cover the costs. You could apply for a home improvement loan, which is a personal loan that you use to cover the costs of your home renovations. There is no difference between applying for this type of home improvement loan and applying for a standard personal loan. It would be best to check and compare the features, fees and details of the loan before applying. 

Besides taking out a home improvement loan, you could also:

  1. Use the equity in your house: Equity is the difference between your property’s value and the amount you still owe on your home loan. You may be able to access this equity by refinancing your home loan and then using it to finance your home improvement.  Speak with your lender or a mortgage broker about accessing your equity.
  2. Utilise the redraw facility of your home loan: Check whether the existing home loan has a redraw facility. A redraw facility allows you to access additional funds you’ve repaid into your home loan. Some lenders offer this on variable rate home loans but not on fixed. If this option is available to you, contact your lender to discuss how to access it.
  3. Apply for a construction loan: A construction loan is typically used when constructing a new property but can also be used as a home renovation loan. You may find that a construction loan is a suitable option as it enables you to draw funds as your renovation project progresses. You can compare construction home loans online or speak to a mortgage broker about taking out such a loan.
  4. Look into government grants: Check whether there are any government grants offered when you need the funds and whether you qualify. Initiatives like the HomeBuilder Grant were offered by the Federal Government for a limited period until April 2021. They could help fund your renovations either in full or just partially.  

How long can you fix a home loan rate for?

Most lenders should let you fix your interest rate for anywhere between one and five years. While rare, a few lenders may offer fixed rate terms for as long as 10 years.

Fixing your home loan interest rate for a longer term can keep your budgeting fairly straightforward, as you shouldn't have to factor in changes to your mortgage repayments if variable rates change, such as when the Reserve Bank of Australia (RBA) changes its rates at its monthly meeting. Additionally, if variable rates rise during your fixed rate term, you can continue to pay the lower fixed rate until the fixed term ends, potentially saving you some money.

Of course, a longer fixed term also means a longer length of time where you may have less flexibility in your home loan repayments. It’s also a longer period where you won’t be able to refinance your mortgage without paying break fees. If variable rates were to fall during this period, you may also be stuck paying a higher fixed rate for a longer period.

Can you borrow the deposit for a home loan?

Most lenders will want the majority of your home loan deposit to be made up of ‘genuine savings’ which is income earned from your job. While a small number of lenders may let you use a personal loan or a credit card to help cover the cost of your deposit, this may potentially cost you more in interest, and put your finances at higher risk.

If you haven’t saved a full deposit, it may be possible to effectively borrow the deposit for a mortgage with the help of a guarantor. This is usually a parent of other family member who guarantees your mortgage with the equity in their own property.

It may also be possible to borrow the money for a home loan deposit from a family member (e.g. the Bank of Mum & Dad) or a friend, provided you draw up a formal legal agreement to pay this money back, showing your mortgage lender that you’re taking responsibility.

How fast can you get a home equity loan?

Completing an application for a home equity loan may only take 20 to 30 minutes. It may take a lender anywhere from a day to a few weeks to process and approve your application. This may be affected by your financial situation, your level of equity, and whether or not your lender needs to organise an in-persona valuation of the property.

 Before you can apply for a home equity loan, you’ll need to build up some equity in your property. The more money you can put towards extra repayments to reduce your home loan principal, the faster you can increase your equity. Also, if property values in your area increase, this may help deliver an instant equity increase once your property has been valued.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.