Home improvements continue to be very popular among Australia’s property owners. A quick glance at a current television guide showing numerous primetime home-improvement reality shows will confirm that very quickly!
Renovations are a great way to add value to an investment, especially those that are bought relatively cheaply and can be ‘done up’ to increase market price. They are also a great way to increase the standard of living in a property you are living in.
Home equity loan
A common way to borrow money for a renovation is a home equity loan. This is where the bank will lend you money against the value of your home. If your property is worth more than the amount still owing on it, that amount is the equity in that home. Banks are usually willing to lend around 80 per cent of this amount.
So if your property is worth $500,000 on the market, and the amount owing on it is still $380,000, the bank can lend you around $96,000 which is 80 per cent of the $120,000 equity held in that home.
What if the cost of your renovations is going to be more than the amount of equity currently in your home? You might be able to take out finance against the predicted value of your home once the new constructions are completed.
In the previous example, if you wanted to renovate to the tune of $200,000, the $96,000 the bank would be willing to lend in a home equity loan would fall short. But if the value of the home once the renovations are completed is estimated at $800,000 instead of the pre-renovation $500,000, you can apply for finance, again at around 80 per cent of the amount, of the $420,000 of equity in the home. This would give you access to a $336,000 construction loan.
To cover their risk in a construction loan, most financial institutions or companies will not give out the entire loan upfront, but rather in phases as it is needed in the construction to ensure it is going towards making the property more valuable, instead of towards anything else.
If you’ve only just purchased your property and it holds no equity, you can take out a personal loan to fund the renovations you’re keen to take out.
A personal loan would generally be for smaller-scale renovations as they are usually for around $30,000 or less.
Another drawback is they can attract higher interest rates than your home equity loan.
Another good option for a minor renovation could be a credit card. Credit card finance is comparably easy to obtain making it a good option but it comes with the risk that it might be spent on other things or that minimum payments might not be kept.
The interest rates on credit cards are higher than the other options here, but there is no time limit so payments can be made that suit the credit card holder. Keeping the payments low and stretching the time it takes to pay back the credit card however costs more in the long run due to escalating interest payments.
To renovate or not to renovate?
If you want to borrow for renovations for your property, you essentially need to work out two things:
- Will the renovations definitely increase the value of the property to the level you hope?
- Can I afford the repayments? A property worth more is of no use if you can’t pay back the loan you took to pay for it.
If the answer to these two questions is yes, call Perry Finance to discuss the best option for you in taking out finance for your home improvement.