How to fund your renovation

Renovations can increase your property's value and give you the dream home you've always wanted. However, it's likely to be an expensive process and many homeowners delay renovations because they don't know how to cover the costs.

Here we'll go through the various ways you can get the funds you need to pay for your renovations. Chances are if you aren't just doing minor improvements (e.g. painting or changing fixtures), you may need to consider other options than dipping into your savings.

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Use your equity

You may be able to access your equity if you’ve already paid off a portion of your home loan, or your home has increased in value over time. Using your equity to borrow money for your renovation may be a good idea in the long term, as you may be able to increase the value of your home by renovating and improving important features.

Equity is built by paying off your loan balance and/or your property increasing in value. You can calculate your equity by subtracting the difference between your outstanding home loan balance and the property's current market value. For example, if your home is now valued at $500,000 and you owe $200,000 on it, your equity is $300,000.

You can potentially build equity without making any repayments on the principal of your loan if your property increases in value. This can happen through:

• Changes in the property market
• Your suburb experience growth and popularity, possibly due to infrastructure development
• Renovation projects or improvements made to the property

How can you access equity?

You can access your equity by refinancing your home loan. This means replacing your existing loan or updating the terms of your current loan, which can also help you get a lower interest rate or more flexible terms. Using your equity to refinance can help you get a sum of money for your renovation while also getting a better rate on your home loan.

Your lender may need to conduct a valuation of your home in order to estimate your current Loan to Value ratio (LVR) and ultimately calculate how much equity you can access.

When accessing equity it’s important to be aware that you are increasing your debt and your repayments are likely to increase, or it may take longer to pay off your loan in full.

Redraw facility or offset account

If your home loan features a redraw facility, you may be able to redraw any extra funds that you have been paying towards your home loan, to fund your project.

You can access the extra funds that you put in to pay off your home loan faster, over and above the minimum monthly payments. While this can be convenient for spending money on your project, you may want to be aware of any fees for withdrawing these funds.

An offset account can be a good option as well. The difference is that an offset account is a kind of savings account linked to your home loan amount. Any funds in this account offset how much interest you are charged over the course of your loan term. Potentially by saving on interest, you might have more money to put towards your renovation.

Other loan options

Personal loan

Maybe you’ve already paid off your home loan or you don’t want to go through the hassle of refinancing, personal loans can offer an easier option of a smaller amount of money more suited for projects such as repairs. You can choose from fixed or variable rate loans that are best suited to your needs.

This can offer you a sense of flexibility but may also complicate things for you because you’re taking on another form of debt. You may have to deal with different repayment plans if you’re still paying off your current home loan.

A major drawback to using a personal loan to fund your renovation is that you can expect higher interest rates than if you used an equity home loan.

Building and construction loans

If you’re looking to make some big structural changes to your home, you may want to consider whether you meet the conditions for a construction loan. It is typically a sum of money offered in increments called “progress draws”. These stages may include:

• Foundation
• Frame and brickwork
• Lock up
• Second fix
• Completion

Depending on the scale of your renovation, the funds are given in advance for each stage of construction, and interest is typically charged against each installment drawn. Your lender may send qualified valuers to check on the construction progress against the planned stages. Preparing detailed construction plans and having a budget can help your lender determine the amount to offer you.

Credit Card

Getting an interest-free or low interest credit card can offer you more flexibility to purchase items needed for your renovation. Beware that credit cards have no set repayment period and typically come with hefty interest fees. There are some credit cards come with an interest-free period where you will not be charged interest until after that period and can be an option as long as you can responsibly manage your repayments.

Since credit cards are often high interest financial products, its important to read through the T&Cs before settling on one.

Don’t overcapitalise

Overcapitalisation occurs when the value of the property does not increase by the same amount you spent on renovating the property. If you plan to live in your property for a long time then spending money on a swimming pool might not bother you, but if you’re renovating to sell, plan wisely. Compare the value of similar properties in the area and budget accordingly.

If you’re interested in seeing how much equity you could access from your home chat with a mortgage broker or Lendi Home Loan Specialist.

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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.