You love the area you live in but your family has outgrown the house. Rather than packing up and moving into new digs, you can renovate your current home to meet your needs and avoid compromising on location.
Working with an architect or builder to decide how your revamped home will look is the fun part of renovations – determining how you will pay for it can be much more daunting. Here are some options you may want to look into:
Personal loans come in all shapes and sizes – most commonly used to finance a new car or a holiday, they can also be a simple and cost-effective way to finance your renovation if you are spending less than $50,000. Although interest rates are generally higher than those of mortgages, an unsecured personal loan attracts a lower interest rate than credit cards and their shorter life span – generally three to five years – means interest costs are minimised. Interest rates can be fixed for the duration of the loan. Search RateCity for low rate personal loans with secured loan rates from 7.39 per cent, and unsecured loan rates from 7.90 per cent.
Low-interest credit card
If your renovation is an inexpensive DIY project of minor cosmetic changes, you can use a low-interest credit card to pay for it. This is handy if you are buying materials online or over the phone. But like any credit card purchases you must manage costs wisely and pay the debt as quickly as possible to minimise interest costs.
Redraw on your mortgage
If you have made extra payments on your mortgage and have a redraw facility, you can access the extra money you “overpaid” and use it to finance your renovations. However, keep in mind that you will lose the benefit of reduced interest charges on your mortgage because your loan balance will go up.
Extend your current mortgage
Probably the most common way to fund an extensive renovation, increasing your mortgage can give you access to renovation funds. This option relies on the equity you have built in your home, which is the amount your home is worth minus the amount you still owe on your mortgage.
For example, if your home is worth $600,000 and you still owe $400,000, you have $200,000 equity in your home. Like borrowing to buy a home, you may only be to borrow up to a proportion of the value of the home, depending on loan-to-value ratio. Your lender may charge a fee for increasing your mortgage. And keep in mind that your loan repayments will increase and it will take you longer to pay off your mortgage.
A new mortgage
Another common way to finance your renovation is by refinancing your mortgage with a new lender, allowing you to shop around using a comparison site such as RateCity for a lower interest rate and more suitable loan features. When refinancing, however, you may have to pay exit fees from your existing mortgage, as well as upfront fees like application fees on the new mortgage.
As with any financial decision, your choice will depend on your individual circumstances. Be sure to consider all costs and research your options.