Home Renovation Financing: What are your options?
With home renovations big business in Australia, let’s explore how you might finance your next home improvement project.
It’s well known that Australians are house proud and love their home improvement projects. While there's no denying that a carefully planned and executed renovation can greatly improve your lifestyle, and even boost the value of your home, they don’t come cheap. High construction demand, inflation and a shortage of skilled tradespeople have seen material and building costs climb higher and higher.
Despite this, according to the Australian Bureau of Statistics (ABS), Australian’s spend more than $10 billion each year on home renovations. So just how are people financing these projects?
There are several approaches for home renovation financing, each having their pros and cons that need to be considered against your own personal circumstances. Finding the most suitable option is a key step in turning your plans into reality. So, let’s look into five possible ways you might pay for your next home improvement project.
1. Pay Out of Pocket
If you are in the fortunate position to be able to withdraw money built up in an offset account, redraw facility, or savings account, you may not need to take on a home renovation loan at all. By funding the project with your own money, you can avoid the need to take on a home renovation loan and by virtue you spare yourself the associated financial risks and stress that comes along with any lending. With no interest repayments, long term this approach can also be the cheapest option for those with sufficient funds available to pay for their project.
Withdraw from an Offset Account or Redraw Facility
Offset accounts and redraw facilities are features offered by certain home loans that provide homeowners with the option to deposit their funds into their home loan or a linked account. This additional money helps in reducing the amount of interest payable on the loan, going beyond the regular home loan repayments.
Typically, homeowners can access these extra funds as needed, subject to the conditions set by the lender. However, if you are considering utilizing an offset or redraw facility, it is important to consider the long-term impact on your loan. Money saved in an offset facility effectively decreases the interest charged on top of the loan's principal. Therefore, reducing the amount being offset against your home loan could result in paying more interest overall. Additionally, any potential reduction in loan term due to the decrease in interest would be negated.
Dip into Savings
Before using your savings to finance your renovations, it is advisable to ensure that you retain an "emergency fund" even after withdrawing the necessary amount for your home improvements. Having a financial cushion for unexpected expenses can provide valuable peace of mind. It's important to strike a balance between funding your renovation project and maintaining a contingency fund for any unforeseen circumstances that may arise.
Cash in Shares or Investments
Selling shares or investments to finance a renovation necessitates careful consideration, as market fluctuations and potential tax implications can significantly impact the viability of this option. It is advisable to consult with an accountant or financial advisor to ensure a thorough understanding of these factors before proceeding with this approach.
2. Refinance your home loan
If you have accumulated sufficient equity in your property, refinancing presents itself as a viable option to explore. Equity refers to the difference between your home's value and the remaining balance of your mortgage. Through refinancing, you may be able to utilise this equity and secure the necessary funds for your renovations.
There are two main approaches you can take. The first is to negotiate with your current bank to top up your existing loan amount or obtain a new loan altogether. Alternatively, you can explore other banks that offer more favourable interest rates or terms.
It's important to be aware that refinancing a home loan may entail associated fees and charges. Additionally, borrowing extra funds will impact your loan repayments or the duration required to repay the loan. On top of this, you will likely be paying interest on the additional funds right away even before any renovations have started. A good strategy to negate this, is to place the additional renovation funds into a 100% offset account (provided your home loan offers such a facility). This allows you to avoid paying any interest on the additional amount until it is utilised.
Another option worth exploring is refinancing with a line of credit home loan, which permits accessing funds on an as needed basis, with interest charged only on the outstanding balance.
Refinancing is akin to obtaining a new home loan in terms of commitment and process. Therefore, it is essential to carefully evaluate the implications it may have on your overall financial situation. If you do decide to refinance, take the time to shop around for competitive loan products.
3. Apply for a construction loan
If you're undertaking a substantial renovation project, such as an extension or a complete rebuild, you might want to consider a construction loan. These loans are typically based on the estimated post-renovation value of your property, allowing you to drawdown the necessary funds to cover invoices related to the renovation as they are received.
In some cases, construction loans offer an interest-only repayment option for a specific period. Eventually, they will transition to principal and interest payments at a later date. Depending on the lender's guidelines and your preferences, this loan could be in addition to your existing mortgage, often referred to as a second mortgage. Alternatively, you may choose to refinance your current home loan into a construction loan, depending on what aligns best with your needs and the lender's regulations.
4. Use a personal loan as a dedicated renovation loan
A renovation loan can take the form of a personal loan, which is commonly used to finance home improvements. Personal loans typically offer lower maximum borrowing limits, often around $50,000 to $75,000. If this amount is sufficient, you will then normally have the option to choose between a secured or unsecured loan.
In general, secured personal loans tend to have lower interest rates compared to unsecured loans. Like other types of secured financing, personal loans allow you to use various assets as collateral, such as term deposits, vehicles, or property. The interest rates will also vary based on the chosen loan product, terms chosen, and your credit history.
There are also now specific loan options worth available for homeowners interested in making environmentally friendly changes to their property, such as installing solar panels.
It’s a good time to note that personal loans in general will usually have higher interest rates compared to a competitive home loan interest rate. Therefore, it's important to weigh the advantages and disadvantages of obtaining a separate personal loan versus refinancing your existing home loan.
5. Other home renovation loan options
For smaller renovation projects, using a credit card or an overdraft facility linked to your everyday transaction account might be a reasonable option as opposed to taking on a renovation loan. These options generally come with higher interest rates and fees compared to other forms of financing. Therefore, they may not be suitable for all renovation projects, especially if you anticipate being unable to repay the funds quickly.
Lastly, it is always a good idea to spend a bit of time researching potential grants or interest-free loans that may be available depending on your location and type of renovation. Often local or state governments have offers and incentives for certain types of home improvements that could help you save money.
As always, please reach out if you have any questions or want to discuss how we can help you finance your next home renovation project!
