Renovation Nation: 37% of Aussie homeowners are renovating this year

Renovation Nation: 37% of Aussie homeowners are renovating this year

Australia has become a nation of renovators according to new research which shows more than one in three homeowners are improving their homes this year.

A new RateCity.com.au survey of over 1000 Australians found that of the people who owned a property, 37 per cent of respondents were altering or renovating their homes in 2021.

Among those renovating, the most popular amount to spend was between $5,000 and $25,000.

The survey also found that 22 per cent of people who had been saving for a holiday in the last year, but could not travel because of COVID, are instead using that money on a renovation.

Why are so many Australians renovating?

RateCity.com.au research director, Sally Tindall, said lifestyle changes brought on by COVID has been a driving force for many Australians to renovate.

“Lockdown living has seen many families save. In fact, according to APRA, there’s $124 billion more in the bank from households compared to a year ago at the start of COVID,” she said.

“Expensive overseas holidays have been delayed or cancelled, helping people to save more money. Our survey also found that 22 per cent of people who were saving for a holiday in the last year are re-directing that money towards a renovation.

“As well as tapping into savings, more Australians are also taking out loans to pay for their renovations,” she said.

In the last year, owner-occupier homeowners have taken out a total of $3.12 billion in loans for alterations, additions and repairs, according to the latest seasonally adjusted ABS data.

“Working from home has made many people realise they need larger, more functional homes.

“While moving to a bigger house can often be an easy fix for people looking to upgrade, a lack of stock in a booming property market has made this option financially unviable for many families.

“Many people are finding it is more economical to renovate their own home than to buy and sell, particularly when factoring in costs such as stamp duty,” she said.

Options to finance a renovation

    • Savings: Tapping into existing savings can be a low risk, straight forward option.
    • Offset/redraw: If you are ahead on your mortgage repayments you could pull this money out. However, be aware the longer you take to put that money back in, the more it will cost you in the long run.
    • Withdrawing equity from your home: If your home has increased in value, you might be able to pull out equity by refinancing. While the interest rate on a refinancing deal is likely to be lower than a personal loan, if you pay that money back over 30 years it could end up costing you more in the long run.
    • Construction loan: For large renovations or rebuilds a construction loan can be added on top of your existing home loan. These loans can be interest-only for a period of time before they revert to principal and interest.
    • Personal loan: Typically, you can borrow up to $50,000 for a personal loan to fund renovations and it can be either secured or unsecured. Interest rates have a huge range and will often depend on your credit history. If you you’re looking for ‘green’ upgrades, there are ultra-low rate options available, including 0.99% from CBA. 

The cost of taking $50,000 from your home loan

RateCity.com.au has crunched the numbers on how much extra the average customer with a $500,000 home loan balance and $50,000 in their offset would pay in interest if they used their offset money to renovate their house.

If they put the $50,000 back into the offset account in equal instalments over 5 years they would pay an additional $6,533 in interest, compared to if they didn’t withdraw the money.

However, if they put this money back over 10 years, instead of 5, the extra interest paid would rise to $12,605.

Scenarios Estimated total interest paid over 25 yrs Extra interest paid by taking out $50,000
Leaving $50K in offset account for remainder of loan

$158,159

 
Taking $50K out of offset and returning the money over 5 yrs

$164,691

$6,533

Taking $50K out of offset and returning the money over 10 yrs

$170,764

$12,605

Source: RateCity.com.au Assumes $500,000, 25 years remaining on home loan, paying principal and interest on the RBA average existing customer variable rate of 2.95% and that the first instalment back into the offset account happens on day 1. Assumes monthly repayments and interest rates remain the same. Calculations are estimates only.

 

Tips for homeowner renovating

  • Factor in a buffer as budget blowouts are common.
  • If you take out a loan or use your offset/redraw repay the money as quickly as possible.
  • Compare notes and quotes by joining renovating forums and speaking to friends.
  • Get multiple quotes from tradies and suppliers.

RateCity.com.au research director, Sally Tindall said: “Factor in a buffer because when it comes to renovations, blow outs are commonplace.”

“If you are getting a loan to fund your renovations, work out how much extra you will need to pay both in your monthly repayments but also over the life of the loan,” she said.

If you are taking money out of your offset account or redraw facility, try and put that money back as quickly as you can. The longer it takes to repay the money, the more you’ll pay in interest.

Joining a renovating forum or talking to friends who have recently done up their house can help you find suppliers and tradies,” she said

How much people who are renovating this year are planning to spend

Value Percent
Less than $5,000 22%
$5,000 - $25,000 40%
$25,000 - $50,000 15%
$50,000 - $100,000 10%
More than $100,000 13%

Source: RateCity.com.au survey

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Learn more about home loans

Is a home equity loan secured or unsecured?

Home equity is the difference between its current market price and the outstanding balance on the mortgage loan. The amount you can borrow against the equity in your property is known as a home equity loan.

A home equity loan is secured against your property. It means the lender can recoup your property if you default on the repayments. A secured home equity loan is available at a competitive rate of interest and may be repaid over the long-term. Although a home equity loan is secured, lenders will assess your income, expenses, and other liabilities before approving your application. You’ll also want  a good credit score to qualify for a home equity loan. 

What is a construction loan?

A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.

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 is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

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 do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

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.

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 does an offset account work?

An offset account functions as a transaction account that is linked to your home loan. The balance of this account is offset daily against the loan amount and reduces the amount of principal that you pay interest on.

By using an offset account it’s possible to reduce the length of your loan and the total amount of interest payed by thousands of dollars. 

Example: If you have a mortgage of $500,000 but holding an offset account with $50,000, you will only pay interest on $450,000 rather then $500,000.

What are the different types of home loan interest rates?

A home loan interest rate is used to calculate how much you’ll pay the lender, usually annually, above the amount you borrow. It’s what the lenders charge you for them lending you money and will impact the total amount you’ll pay over the life of your home loan. 

Having understood what are home loan rates in general, here are the two types you usually have with a home loan:

Fixed rates

These interest rates remain constant for a specific period and are a good option if you’re a first-time buyer or if you’re looking for a fixed monthly repayment. One possible downside of a fixed rate is that it may be higher than a variable rate. Also, you don’t benefit from any lowering of interest rates in the market. On the flip side, if rates go up, your rate won’t change, possibly saving you money.

Variable rates

With variable interest rates, the lender can change them at any time. This change can be based on economic conditions or other reasons. Changes in interest rates could be beneficial if your monthly repayment decreases but can be a problem if it increases. Variable interest rates offer several other benefits often not available with fixed rate home loans like redraw and offset facilities and free extra repayments. 

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

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.  

What is an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

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.