5 ways to fund a renovation

Considering transforming your home from ‘banal’ to ‘brilliant’, but lack the funds to support your makeover? Never fear, we’ve rounded up five home renovation finance options that could help turn your dream into reality.

1. Equity Release / Top Up Home Loan

This is probably the most common way people borrow money when they want to renovate. It involves borrowing against the current value of your home, before any value-adding renovations and in most cases allows you to obtain the funds upfront. You won’t be able to borrow the full value of your home but, without mortgage insurance, you can usually borrow up to 80 per cent of its value if you own it outright. One potential problem is that the cost of your renovations may actually be higher than the equity you have available. If you run out of funds mid-construction, and if the property is then not in sound, lock up condition, you may have an issue obtaining extra funds down the track.

2. Construction loan

If you’re planning to completely transform your home and undergo a major makeover, this may be a good option as you can spread the cost over a long period of time. You could even possibly borrow up to 90 per cent of the end value of your home and take advantage of mortgage rates which tend to be lower than credit card and personal loan rates. With a construction loan, the lender will assess the value of your home after the renovation based on the building plans and you can typically borrow against that value.  You won’t be given the full loan amount upfront, but usually in staggered amounts over a period of time – this is called ‘progress payments’ and is linked to a fixed price building contract which will be from your builder.

3. Line of credit

When you apply, you can establish a revolving credit line that you can access whenever you want to up to your approved limit. You only pay interest on the funds you use and, as you pay off your balance, you can re-borrow the unused funds without reapplying if that becomes necessary.  However, care must be taken not to get in over your head in terms of serviceability. Make sure you can make repayments on the line of credit that will reduce the principle because your minimum repayment only pays the interest, it will not reduce the loan. Rates on this product are typically much higher than a construction loan or top up loan. This product feature is great if managed well, but can also be a trap if not seriously considered as your limit will never change.

4. Personal loan

If you’re only making minor renovations – personal loans are usually capped at around $30,000 – this might be suitable, but interest rates on personal loans are higher than on home equity loans and payments need to be made usually over a maximum of seven years.

5. Credit cards

This option should only be considered if you want to undertake really small renovation projects. The interest rates are usually much higher than on mortgages, but for a very small project, that extra interest might actually total less than loan establishment fees.

*HomeBuilder

If you’re looking for further assistance to be able to afford your property renovation project, the Federal Government recently announced $25,000 grants for eligible Australian owner-occupiers to build a new home or substantially renovate an existing home. The Government’s HomeBuilder package is designed to assist the residential construction market by encouraging the commencement of new home builds and renovations. Income and other conditions apply and this grants program is active until 31 December 2020. For more information visit the Treasury website.

One thing you must do

There are very few exceptions to the rule that your renovations should add more value to your home than they will cost to carry out. Think about how the money you spend on a renovation will increase the value of your property. For example, consider making changes that would appeal to the majority of potential buyers to help you sell your house faster and at a higher price.

When is the best time to refinance your home loan?

As a home owner with a mortgage, chances are you’ve heard of the term ‘refinancing’. Refinancing involves reviewing your current mortgage, and potentially swapping your loan to another lender who can better meet your current needs, wants and circumstances.

Refinancing can also allow you to consolidate your debts or pay down your mortgage more quickly.

Another common reason borrowers look to refinance is so that they can access equity – the amount you’d get from selling your home after settling any associated loans, such as a mortgage on that property, and any other costs associated with the property. Depending on that amount, you may be able to access equity in the property without having to sell it, for example, to make home renovations or to buy an investment property.

However, refinancing is not suited to everyone. There are many different factors you will need to consider when thinking about refinancing a loan. Before you initiate an application to refinance, your broker will need to assess your needs and objectives as well as your current financial situation.

So how will you know that refinancing is the right option for you?

The first step is to speak to a professional, such as a mortgage broker, about your needs and whether you can afford a different loan structure or other change to your mortgage, particularly if you have more than one property.

Are you looking to pay less interest?

Some people are savvy researchers and will want to take advantage of a lower interest rate from another lender should that be available to reduce repayments. If you aim for a lower interest rate, this could potentially save you a lot of money in the long term.

While saving money is often one of the biggest benefits of refinancing, it may not be as straightforward as that and careful consideration is required.

At this point, the broker will need to find out about your existing loan, repayments and current loan structure.

Your mortgage broker will also need to find out more about your current financial situation, including your income, any other current debts and about any assets you own.

The current value of the property is also taken into consideration, so your broker will have access to current data that will indicate what your property is likely to be worth.

The broker will then review the various loan options and figure out whether it’s worth it for you to refinance. Sometimes it’s not worth it if it’s only going to save a couple of hundred dollars a year, particularly when you take into consideration the exit and application fees involved. But if it’s going to save upward of $1,000 a year, refinancing might be a sensible approach.

In some cases, the mortgage broker can tell you if getting a lower interest rate from your current lender can be achieved without refinancing.

Do you want to change your loan type?

One of the risks of refinancing your home loan is that you may need to pay Lender’s Mortgage Insurance (LMI) to your new lender. If switching your loan means you will need to pay LMI again, it may not be worth refinancing.

If you do decide to go down the refinancing path, working with a broker rather than going straight to a lender has advantages. Broker’s generally have access to loan options from a range of different lenders (on average 34 lenders), and if there’s a better opportunity for you, they’re usually able to access it.

It is important to consider that when you take up a new home loan, it can incur exit fees and may not have all the features your existing home loan has.

Have your circumstances changed?

If you had a recent major life change such as a because of a loss of income or a change in marital status, you might be looking to refinance.

If you want to refinance to lower lending costs to help you manage your monthly repayments, speak to your mortgage broker who can negotiate with your current lender for a rate suitable to your current situation.

Your broker can also help you look at alternate options to consolidate your personal loans and credit cards into the one loan. This could help you in lowering your monthly repayments, or help you keep your repayments on time and even save you interest in the long-term. Indigo finance has access to many lenders and their products and have the expertise to help you through the refinance application process.

 

 

Concerned about servicing your loans?

If you are concerned about servicing your loan, reach out to your local mortgage broker for help.

As Australians everywhere take a close look at their financial circumstances, mortgage brokers stand ready to lend a helping hand.

Whether experiencing financial hardship through job loss, a reduction in work hours, or business disruption, an increasing number of Australians may be struggling to balance their books as a result of the Coronavirus, and in many cases are wondering how they will continue to pay the bills.

Difficulty with repayments

According to research conducted by Finder in early 2020, about one in five mortgage borrowers, or about two million Australian households, were struggling to make repayments, despite record low interest rates.

And with the challenging circumstances that have emerged since, it is anticipated that these pressures will only increase forcing more people to require financial assistance.

Financial relief strategies

In this difficult time lenders have responded by announcing financial relief strategies. In an official Australian Banking Association (ABA) statement, CEO Anna Bligh said, “Banks stand ready to support customers and if anyone is in need of assistance, they shouldn’t wait but come forward as soon as possible”.

Different lenders have different assistance options. These may include, waiving fees on early term deposit withdrawals, interest rate freezes on loans, options to defer or restructure home loan repayments, and emergency credit card limit increases.

It is important to remember that mortgage brokers have the knowledge, experience and relationships necessary to assist people experiencing or expecting to have trouble paying their home loans as a result of changing circumstances.

In times like these, the importance of mortgage brokers in assisting customers with hardship and facilitating access to credit cannot be overstated. For many Australians – particularly those in rural or regional areas – brokers may represent the only source of assistance.

Expertise of brokers is of critical support

Brokers’ expertise in helping customers navigate the complex home lending market – and their intimate understanding of their customers’ personal circumstances – means they are uniquely positioned to provide critical support for customers when discussing hardship and available options with lenders.

If you have any questions or concerns about your existing loans, need further guidance on hardship assistance, or have other questions about your loan arrangements please give us a call today.