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Can I get a cash out loan to fund my renovation?

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Have you bought a fixer-upper? Or, are you planning on upgrading your old kitchen? Finding the money to fund your renovation can be time consuming and hard to navigate.

Here we'll walk you though the pros and cons of an equity home loan and how to make sure you don't overcapitalise when you renovate your property.

How much equity can you access?

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Can I refinance to pay for my renovations?

This all depends on your personal situation. If you have a significant amount of equity in your property, you can apply for a cash out loan to pay for your renovations. You can typically access up to 80% of your current property's equity. How much equity you can access will vary from lender to lender and depends on how much you have already repaid.

What is a home equity loan?

A home equity loan, sometimes known as a ‘cash out loan', allows a homeowner to access the equity accrued in their property.

The amount of equity that can be accessed (loan amount) and interest charged is determined by:

  • The property’s current value
  • How much of the loan has been repaid
  • Homeowner’s credit score and personal finances
  • Purpose of the loan
  • The current state of the property market.

Home equity loans are useful because they allow homeowners to access large sums of money, without needing to sell their property. Compared to other home loans, home equity loans are easier to qualify for and lower risk for lenders since the property itself is used as collateral against the loan.

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What are the benefits of home equity loans?

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  • The biggest advantage of taking out a home equity loan is that the funds available will allow you to renovate your home. Hopefully, your renovations will increase the market value of your property. This may come in handy if you want to sell the property in the future.
  • Another advantage of a home equity loan is that you will have access to a large sum of money without having to sell your house. The money can be withdrawn at any time, allowing you to use it when you need it.
  • If the loan is taken out with a line of credit account, you can make extra repayments whenever you want. This could reduce the total amount of interest paid on the loan and could also reduce the term of the loan.
  • Home equity loans can also have lower interest rates than other types of loans you might use to fund a renovation, such as credit cards or personal loans.

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Dreaming of that perfect kitchen? Find a great cash out loan with Lendi

What are the risks of accessing your equity?

  • The biggest risk with any home loan is that, if you are unable to make your new repayments, you can lose your house to your lender.
  • Further disadvantages of taking out a home equity loan could be that you will increase the amount of money that you owe your lender.
  • The equity that is taken out will be added to the principal amount and interest repayments, meaning that you will have higher repayment amounts and it will take you longer to repay your loan.
  • Also, because the money is easily accessible, you may be tempted to spend it on other things. For this reason, home equity loans may not be suitable for those who struggle to budget or manage their finances, or those who do not have a stable income.
  • Your LVR (Loan to Valuation Ratio) may increase. If your new LVR is more than 80% of the property’s value, it could mean that you will need to take out LMI (Lenders Mortgage Insurance) with your new application.
  • There may also be fees and costs associated with taking out a new home equity loan and for your existing home loan because you are refinancing, that is, changing home loan products or lenders.

Whether you want to buy, refinance or renovate - Lendi makes home loans simpler

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What is overcapitalisation and why is it bad?

Overcapitalisation is also a risk when renovating. Overcapitalisation occurs when the value of the property does not increase by the same amount you spent on renovating the property.

For example, say your property is worth $500,000 and you spend an additional $200,000 on renovations, if the value of your property after the renovations is only $650,000 then you have overcapitalised by $50,000.

This may only be a problem if you are renovating for the purpose of selling your property right away because you won't make the money you spent on renovations back. However, if you intend to stay in your property for a number of years, you may not need to worry about overcapitalisation, as you may still benefit from the renovations by improving your lifestyle and because property prices in the area can fluctuate over time.

Financing your renovation shouldn't be a headache. Lendi makes it simpler

Before deciding to take out a home equity loan, make sure that you have researched your options and assessed your current and future financial situation carefully. For free expert advice, chat to a Lendi Home Loan Specialist today.

How much can you save by refinancing?

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How much equity can you access?

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Don't know your property value?
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Got a question?

Get free expert home loan advice. Schedule a callback from one of our Home Loan Specialists.

Tags: renovate, renovation, home equity loan

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Important legal stuff

Lendi is the trading name of Lendi Pty Ltd (ACN 611 161 856, Credit Representative 518849), a related body corporate of Auscred Services Pty Ltd (ACN 164 638 171, Australian Credit Licence 442372). We will never sell your email address to any third party or send you nasty spam, promise.
Lendi is a privately owned and operated Aussie business. Our mission is to provide Aussies with the right experience when choosing a home loan from our panel of lenders including ClickLoans, a related body corporate of Auscred Services. Although Lendi compares over 1600 products from over 35 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. While Lendi is 40% owned by founders and employees, we have also been supported by some great minority shareholders including Bailador, Macquarie Bank Ltd and a number of Australian sophisticated investors. We have an independent and founder led board.
WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years.
EXAMPLE: This example is current as at 20th October 2016. A Click Loans Online Principal and Interest Loan of $150,000 over 25 years has monthly repayments of $767. This is calculated based on the interest rate of 3.69%, comparison rate of 3.69%, upfront fees of $0 and annual fees of $0.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria.
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