How to finance your renovation

How to finance your renovation

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 loan

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.

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Learn more about personal loans

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

What is the average interest rate on personal loans for single parents?

Like other types of personal loans, the average interest rate for personal loans for single parents changes regularly, as lenders add, remove, and vary their loan offers. The interest rate you’ll receive may depend on a range of different factors, including your loan amount, loan term, security, income, and credit score.

Are there alternatives to $2000 loans?

If you need to borrow $2000 or less, alternatives to getting a personal loan or payday loan include using a credit card or the redraw facility of your home, car or personal loan.

Before you borrow $2000 on a credit card, remember that interest will continue being charged on what you owe until you clear your credit card balance. To minimise your interest, consider prioritising paying off your credit card.

Before you draw down $2000 in extra repayments from your home, car or personal loan using a redraw facility, note that fees and charges may apply, and drawing money from your loan may mean your loan will take longer to repay, costing you more in total interest.

Are there low doc personal loans?

Self-employed borrowers may be eligible for low doc personal loans, which require less documentation in their application process than many other personal loan options.

It’s important to remember that though low doc personal loans may require less paperwork, you may need to provide additional security, or pay a higher interest rate.

Can unemployed single parents get personal loans?

It can be more difficult for unemployed borrowers to successfully apply for a personal loan. Most lenders require borrowers to have a regular income available to cover the cost of loan repayments.

If you’re self-employed, or if less than half of your income comes from Centrelink, you may not be eligible for some personal loan options. Consider contacting the lender before applying.

Will comprehensive credit reporting change my credit score?

Comprehensive credit reporting may change your credit score, either positively or negatively, depending on an individual's situation.

Under comprehensive credit reporting, credit providers will share more information, both positive and negative, about how you and other Australians manage credit products. That means credit reporting bureaus will be able to make a more thorough assessment of everyone’s credit behaviour. That will lead to higher scores for some consumers and lower scores for others.

What do single parents need for a personal loan application?

Much like applying for other personal loans, applying for personal loans for single parents will likely require the following:

  • Proof of identity
  • Proof of residence
  • Proof of income
  • Details of assets (e.g. car, home)
  • Details of liabilities (e.g. credit cards, other loans)
  • Loan amount
  • Loan term

Can students with no credit history get loans?

It is possible for students with no available history of borrowing or managing money to get a personal loan, though it may be more difficult as well as expensive than for borrowers with a good credit history.

Having no credit history means having no credit score. While many lenders may consider having no credit score to be better than having a bad credit score, they may still consider it riskier to lend to an unknown borrower and may charge higher interest rates or fees than to borrowers with good credit scores.

Can you pay off a quick loan early?

Many lenders will allow you to make extra repayments onto a quick personal loan when you can afford them, or even exit the loan early, which can help reduce the total interest you are charged. Be sure to check your quick loan’s terms and conditions, as some lenders charge early exit fees for paying off a loan ahead of schedule.

Is it hard to improve your credit score?

It can be hard to improve your credit score, as it usually requires sacrifice and discipline, but hard doesn’t necessarily mean complicated. Some simple ways you can give your credit score a boost include closing extra credit cards, reducing your credit card limit, pay off any loans and make loan repayments on time.

As a general rule, the lower your credit score, the more remedies you can apply and the greater the scope for improvement.

Can I get a $2000 loan on Centrelink?

If more than half of your income comes from Centrelink benefits, it may be more difficult to have a $2000 loan application approved. Many lenders will check if you can afford a loan’s repayments on the income from your job before they’ll approve an application, and many won’t count Centrelink payments when assessing your income for this purpose.

Some lenders may offer $2000 loans to borrowers on Centrelink – consider contacting potential lenders to check before applying.

What can I use a bad credit personal loan for?

Generally, bad credit personal loans can be used for the following purposes:

  • Debt consolidation
  • Paying bills
  • Buying vehicles
  • Moving expenses
  • Holidays
  • Weddings
  • Education

Some lenders restrict how their bad credit personal loans can be used as part of their commitment to responsible lending – be sure to check before applying.

What documentation is needed for a self-employed personal loan?

Personal loans may require a borrower to provide proof of identity, proof of residence, details of any other outstanding loans (including credit cards), details of assets they own (e.g. savings, car, property), and proof of income.

While borrowers in full-time or part-time employment can often provide payslips and similar documents to prove their income, self-employed borrowers may need to provide other documents, such as bank statements or tax returns, to demonstrate that their income can cover a loan’s repayments.