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

Can I merge my personal loan with my home loan?

Yes, you can refinance your home loan and, in the process, merge or consolidate your personal loan and home loan. By doing so, you can lower the number of debts you have, and you may also reduce the total interest you have to pay.

However, you should consult a financial advisor or a mortgage broker to confirm that you are decreasing your total outstanding debt, including interest payments. The repayment term for a home loan can be much longer than that for a personal loan, and by merging the two, you could be repaying a higher amount over the full term.

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.

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.

Should I get a fixed or variable personal loan?

Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.

Can I get a bad credit personal loan with a guarantor?

Some lenders will consider personal loan applications from a borrower with bad credit if the borrower has a family member with good credit willing to guarantee the loan (a guarantor).

If the borrower fails to pay back their personal loan, it will be their guarantor’s responsibility to cover the 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.

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.

Can I apply for a quick loan online?

While some lenders will require you to provide paperwork in person, many lenders will allow you to make an application for quick personal loan online. You’ll still need to provide information on your identity, income, and loan purpose in most cases.

Can I get a fast loan if I’m unemployed or on Centrelink?

Even if a lender has no credit checks, they will usually still need to confirm you can afford to repay a fast loan on your income before they’ll approve your application.

If 50% or more of your income comes from Centrelink payments, you may find it more difficult to have a fast loan application approved. Consider checking with the lender before applying to confirm if they lend to people on Centrelink.

Can I repay a $3000 personal loan early?

If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to make extra repayments onto your personal loan or medium amount loan could help reduce the total interest you’re charged on your loan, or help clear your debt ahead of schedule.

Check your loan’s terms and conditions before paying extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.

Are there $2000 emergency loans?

If you’re having trouble being approved for a loan of less than $2000 and urgently need to purchase household essentials, there may be emergency loan options available to you.

For example, the No Interest Loans Scheme (NILS) allows low-income borrowers to take out interest-free loans of up to $1500 for essential goods and services.

For further assistance, consider contacting a financial counsellor, or calling the National Debt Helpline on 1300 007 007

What do credit scores have to do with personal loan interest rates?

There is a strong link between credit scores and personal loan interest rates because many lenders use credit scores to help decide what interest rates to offer to potential borrowers.

If you have a higher credit score, lenders will probably classify you as a lower-risk borrower. That means they’ll be keen to win your business, so they may offer you a lower interest rate if you apply for a personal loan.

If you have a lower credit score, lenders will probably classify you as a higher-risk borrower. That means they might be concerned about you defaulting on the loan and costing them money. As a result, they might protect themselves by charging you a higher interest rate.