New year, new home renovations

New year, new home renovations

If you’ve been thinking about renovating your kitchen, or making your home more sustainable and environmentally friendly, now could be the perfect time to start planning.

With property prices on the rise and interest rates at record lows, 2020 could be the year to make your dream home a reality, or to upgrade your property and increase your equity.

Why would you get a loan to cover your home renovations?

Improving your home with renovations can be costly, in terms of labour and material cost, so it’s common to borrow money to fund these projects.

There are a few benefits to getting a loan to cover your renovation.

  • Because you need to determine your loan size, it forces you to work out how much you need to spend in advance.
  • It motivates you to stick to your budget as you only have the loan amount.
  • You can complete your renovation on time as you’ll have the funds available
  • After the holiday period, cash flow can be tight and a loan can help with this

If your renovations are to increase your sustainability, there are now ‘green’ loans available that can help you purchase solar panels, energy efficient lighting or to fund other projects that reduce your environmental impact. The main benefit to sourcing these loans is that they can offer lower rates than standard personal loans.

If you are looking to get finance for a home project, you might consider getting a cash out refinance, a home equity loan, a construction loan or a personal loan.

Using your existing home loan to cover the costs

If you want to use your existing home loan to fund your home renovations, there are two popular ways to do this.

Get a home equity loan

A home equity loan is where you use the equity in your home as collateral on your loan. Equity is determined by calculating the difference between what the bank values your house at and the amount you owe on your home loan. As your property price increases and you make your mortgage repayments, you are effectively reducing your loan balance and increasing your equity.

These loans essentially act as a second mortgage on your home where you use your property to secure the loan and reduce the lender’s risk. Borrowing additional funds on your home loan can save you time and means you don’t have excessive forms to fill out, and could mean you get a lower interest rate than you would with a personal loan.

Access your redraw facility

Some home loans offer a redraw facility, which means you have the ability to make extra repayments on your mortgage above the required monthly repayment, at no extra cost to you.

If you have this feature, and have made many additional payments into your home loan, you may want to check if the money in your redraw account will fund the project you wish to carry out. If so, you may have the ability to withdraw these funds as cash to finance your home renovations, without taking out a second mortgage.

However, if you decide to redraw the extra money you have put into your home loan, check there are no excessive redraw fees that apply. Some lenders may also decline certain redraw request, so make sure you check with your lender that you are able to redraw these funds before you decide this is the best option.

Organising a cash-out refinance to boost your equity

Home renovation projects can present you with a good opportunity to review your home loan. Specifically, the new year is a good time to look at your current interest rate, as you may in fact save thousands by switching to a lender with a lower rate, or by switching to a different home loan with your current lender.

Refinancing can provide you with the opportunity to get a cash out refinance, increasing your loan limit and withdrawing the difference in cash. This essentially replaces your existing loan with a new loan, with different terms and conditions, so be sure to check the fine print before you sign anything.

The amount you will be able to withdraw will also depend upon the equity you have built in your home, how much you have paid off your Loan to Value Ratio (LVR) and your current loan term.

If you decide to refinance your home to get cash out for your home renovations, make sure that you do not commit to a much longer loan term. Agreeing to extend the length of your loan term could mean you incur tens of thousands of dollars more interest than your original loan, so be sure to check the loan in detail before you apply.

Funding an extension or additional structure with a construction loan

If you’re looking to build a small extension or a granny flat as a part of your home renovation, you might consider getting a construction loan to finance it. These types of loans cover the expenses you incur as you build, and are a popular alternative for those who are looking to have their funds released in ‘stages’.

Releasing funds in this way can ensure you save money and improve your cash flow whilst the constructed extension or additional structure is being built and not yet in use.

Construction loans often allow you to pay interest only until the construction is complete, however be sure to remember that interest only payments do not reduce the principal loan amount.

Some lenders may also only need a 5 per cent deposit of the total building cost to get started, which could help with your cashflow.

These stages are:

Slab – building the foundation of your home, including the base, plumbing and waterproofing - often approximately 10 per cent of the total amount.

Frame – constructing the ‘frame’ of your home including the windows, roofing and some brickwork - can be around 15 per cent of the total amount.

Lock up – covers the elements that are needed to ‘lock up’ your home, including external walls, doors and insulation - typically 35 per cent of the loan.

Fixing – shelving, kitchen, bathroom cabinets, tiles, cladding and all other internal fixtures and fixings are included in this stage - ordinarily about 20 per cent of the contract.

Completion – the completion of the building contract which includes all final installation pieces, including building property fences, cleaning, painting etc - usually the remaining 15 per cent of your loan amount.

Getting a personal loan to cover your renovation costs

If you only have a small project to complete, don’t have a home loan to borrow against, haven’t built enough equity, or don’t have a redraw facility, you might consider opting for a personal loan.

Personal loans may have slightly higher rates than home loans, but much lower rates than credit cards, so if you don’t have a home loan to borrow against, this could be a good option for you.

Variable rate personal loans secured with collateral may have the added benefit of allowing you to make additional repayments, so you can pay the loan off sooner and save on interest. These are known as secured personal loans, as the collateral increases the security of the loan, and reduces the lender’s risk.

This feature is often not provided with an unsecured personal loan, however, as the bank sees this type of loan as higher risk. These types of loans also have higher rates due to the increased chance you will default on your repayments.

If the reason you’re renovating your property is to make it more environmentally friendly, there are some lenders who offer ‘Green Personal Loans’ with lower rates than standard personal loans to encourage eco-friendly activity.

Investing in sustainable home renovations like solar panels and energy efficient hot water systems can reduce the overall running cost of a home. As such, this could likely increase the value of your property due to the cost savings that energy efficient products can bring.

This can make your home a more attractive investment for buyers in the market, and could potentially increase the equity in your home.

 

Which is the best option for me?

There are many different ways in which you can finance your home renovations, but as with all financial products, it's important that you find what works best for you.

Every individual is different, and the interest rates and products you will be eligible for will depend upon your income, expenses and your individual financial situation.

Before you apply for any financial product, make sure you compare all your available options, check for fees and charges that apply to each, and be sure to check the fine print.

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Learn more about home loans

Can I take a personal loan after a home loan?

Are you struggling to pay the deposit for your dream home? A personal loan can help you pay the deposit. The question that may arise in your mind is can I take a home loan after a personal loan, or can you take a personal loan at the same time as a home loan, as it is. The answer is that, yes, provided you can meet the general eligibility criteria for both a personal loan and a home loan, your application should be approved. Those eligibility criteria may include:

  • Higher-income to show repayment capability for both the loans
  • Clear credit history with no delays in bill payments or defaults on debts
  • Zero or minimal current outstanding debt
  • Some amount of savings
  • Proven rent history will be positively perceived by the lenders

A personal loan after or during a home loan may impact serviceability, however, as the numbers can seriously add up. Every loan you avail of increases your monthly installments and the amount you use to repay the personal loan will be considered to lower the money available for the repayment of your home loan.

As to whether you can get a personal loan after your home loan, the answer is a very likely "yes", though it does come with a caveat: as long as you can show sufficient income to repay both the loans on time, you should be able to get that personal loan approved. A personal loan can also help to improve your credit score showing financial discipline and responsibility, which may benefit you with more favorable terms for your home loan.

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.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

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 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.

Can you remove a cosigner from a home loan?

Taking out a home loan is an act of financial responsibility and a cosigner on a home loan shares that responsibility. For this reason, removing a cosigner from a home loan may not be straightforward. Usually, you can add a cosigner, or become a cosigner, when applying for the home loan. In such a circumstance, the lender may ask you to stipulate the conditions for a cosigner release, which are the terms for removing a cosigner from the home loan. For instance, you may agree that you can remove a cosigner once half the loan amount has been repaid.

However, not stipulating such conditions doesn’t mean it’s impossible to remove a cosigner. If the primary home loan applicant has a sufficiently high credit score and has not delayed any repayments, the lender may be willing to remove the cosigner. You should confirm that doing so doesn’t affect the terms of the loan. If the lender doesn’t agree to remove the cosigner, the primary home loan applicant may have to refinance the loan in order to do so. If there were specific reasons for needing a cosigner and those reasons are still valid, then you may have some challenges with refinancing.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

What are extra repayments?

Additional payments to your home loan above the minimum monthly instalments, which can help to reduce the loan’s term and remaining payable interest.

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 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 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.

Savings over

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.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Monthly Repayment

Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.