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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 project can be time consuming and hard to navigate. You may not be able to cover your renovations with savings, so you may need to borrow money.
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.
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.
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:
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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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, in the long term 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.
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 mortgage broker or Lendi Home Loan Specialist today.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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