How to fund your home renovation
Renovating can be both exciting and stressful. However, with meticulous planning, the right finance options and good timing, it can be an intensely rewarding process and permanently increase the value of your home.
When is the best time to renovate?1
There are no hard and fast rules for when is a good time to renovate. Clearly, you need to have the funds to do so. And renovating can be stressful and time consuming, so ideally you should make sure you have a bit of spare time to manage the admin side of things and avoid doing it at the same time as other major life events such as a new job, getting married or a new baby, (but we do know often these things go hand in hand). These things aside, as we slowly emerge from the COVID-19 pandemic, it is actually proving to be a fantastic time to renovate right now if you can. Here’s why:
1. Government assistance
The new federal HomeBuilder scheme means that if eligible, you may be able to access a government grant of $25,000 to assist with a renovation. You need to move quickly though as your building contract needs to be signed between 4 June and 31 December 2020 and building needs to start within 3 months.*
2. Get started before the post COVID-19 construction boom
As we emerge from lockdown restrictions and budding renovators start to take advantage of the HomeBuilder scheme, some builders are already seeing a rise in enquiries. There are predictions of a construction boom as the economic outlook improves and this could see building timeframes increase and push prices up.
3. Take advantage of low interest rates
Borrowing to renovate is almost as cheap as it can be as you are paying minimal interest, so now may be a great time to take out a loan. Funding a renovation is likely to increase your loan repayments, though, so it’s important to have a stable income.
4. You know exactly what you want
Spending more time at home recently may mean you are very clear on how the functionality of your home needs to improve – more light, heating or cooling, or noise-proofing might be part of your considerations. Experts are predicting that many people will spend more time working from home post-COVID-19.
What do you need to plan your renovation?2
There are a number of important steps in planning and executing a successful renovation, including engaging the right people, deciding on the right design, getting approval and arranging finance. There is some great information here to help you plan your renovation. Here are the key steps:
1. Source an experienced architect or drafter
Do your research, get recommendations and talk to several professionals before you decide who to use. Discuss the tender process, project management, contract administration and arranging the approval process – some architects may be able to help you with these important steps.
2. Create a design
Discuss what you want to achieve with your renovation as well as your lifestyle and budget, so your architect can draw up plans to suit. They should be able to give you a rough guide on costs so you can adjust your design accordingly.
3. Research builders
Find builders who are experienced in the type of renovation you want. Speak to past clients and check references to ensure they are honest, hard-working and fair.
4. Get quotes
It is quite normal to pay for a quote. Make sure it has a detailed bill of quantities, has been shopped out to suppliers and subcontractors and has minimal provisional sums.
5. Speak to your mortgage broker
Before you sign your building contract, make sure that you can borrow the amount you need and maybe a bit extra in case your budget blows out.
6. Choose your builder
Check they have a current licence and insurance policies. Before you sign the contract, check with your state building authority to ensure you know your obligations.
7. Get council approval
Some architects/drafters will be able to help you with the certification and approval process; alternatively, you can use a council certifier. It’s best to use someone who is familiar with your local council, as they know exactly what restrictions you may face and what documents are needed to get your building works approved.
Funding your home renovation
The $25,000 HomeBuilder grant is clearly a big help if you are eligible and you plan to renovate this year. Either way, if you need to borrow to fund your renovation, your Mortgage Choice broker is your first port of call. Typically, your main options include:
1. Using your equity for a loan top-up or additional loan
Most lenders will allow you to borrow up to 80% of your equity – this is your usable equity. You may be able to access this money via a loan top-up, which increases the balance (and repayments) on your existing home loan. Alternatively, you may be able to take out an additional loan.
- Cost-effective and easy to arrange
- Interest rates generally lower than other options
- May have an establishment fee
- Relies on having enough equity.
2. Redraw
If you have been putting extra money onto your mortgage, you may be able to redraw these funds to finance your renovation. This also increases the balance (and repayments) on your existing loan.
- Cost-effective and easy to arrange
- Same interest rate as existing home loan
- Your loan must be eligible for redraw and there may be fees or other conditions
- Relies on having made additional repayments.
3. Line of credit
Alternatively, you may be able to get a line of credit secured against your equity. This is a pre-approved limit of funds you can use whenever you need it, where you are charged interest only on the amount you use. Repayments can be interest-only until your credit limit is reached, but once you have reached your credit limit, you need to start paying off your debt from a different finance source.
- Quick, easy access to funds
- Interest rates higher than a home loan but less than a personal loan
- Helpful when short-term cash flow is a problem
- You must have a good credit history, stable income, financial discipline and be confident you will have the funds down the track to pay it off.
4. Personal Loan
A personal loan may be an option if you don’t have enough equity in your home to borrow against; however, it is usually only suitable for small renovations. A personal loan is similar to an unsecured line of credit, except that, with a set loan term and immediate minimum repayments, you aren’t at risk of ending up with a debt you can’t repay down the track.
Interest rates are higher than most other options.
Loan term is short (up to seven years) so repayments may be higher.
5. Construction Loan
For a major renovation with structural changes, you may need to take out a construction loan. You typically need a 20 per cent deposit and the lender releases a portion of the loan funds as required at each stage of the construction process. You are only charged interest on the amount you have used.
Interest-only repayments during construction help with cash flow. Rates can be slightly higher than for a home loan, but revert to a standard home loan rate after construction
You will need council-approved building plans, a fixed price building contract and your builder’s proof of registration and insurance before a lender will approve your loan.
6. Loan refinance
If your existing lender isn’t able to finance your renovation, you can try refinancing with a different lender who can offer a solution. Different lenders have different risk appetites, loan products and rates, so your mortgage adviser may be able to find a lender who is more suited to helping you fund your renovation.
Renovating can seem like a mammoth task, especially if you haven’t done it before, but with the help of good professionals and some careful planning, it can herald a new chapter for your household.
*Correct as at 24 June, however the 3 month timeframe may change to allow more time for approvals and requirements.
SOURCES: 1https://www.amerex.com.au/blog/why-now-is-the-best-time-to-renovate/, 2https://www.www.homely.com.au/advice/building/renovations/questions-to-ask-an-architect-before-renovating
