Borrowing money for renovations: What you need to know

You’ve been dreaming of that new kitchen and dining room for as long as you can remember and the time has come to put your plans in motion. But, do you really have the budget to afford the work? Here are a few things to think about before making the leap from Pinterest to blueprints.

Work out your budget

Firstly, work out how much your renovation will cost.

Before finalising your plans, arrange for a building inspector to help identify any structural work that might be needed. Major work could increase your budget significantly, so it may be worth your while to talk to a professional and get a more detailed understanding of what’s involved. Architects and master builders are usually happy to provide a quote, so think about getting more than one quote to give you an idea of the range.

In addition, add a percentage for contingencies: most experts recommend that you add another 10% – 20% to the overall budget to cover the delays and complications that will inevitably arise throughout the process.

Once you know the costs, you can start thinking about raising the cash. In an ideal world you’ll have saved up at least part of the amount beforehand, but renovations can run into the tens or even hundreds of thousands, so most people will need to borrow some money.

Unlock your equity

If you’ve been in your home for a while, chances are that you have considerable equity, both as a result of paying off your initial home loan and from rising property values.

Equity is the amount of your home that you own; that is, the value of your property, less the outstanding loan amount. For example, if your property is valued at $500,000 and you owe $300,000 on your loan, your equity is $200,000 ($500,000 – $300,000 = $200,000).

As long as you can meet the repayments and the renovations are likely to add value to your property, most lenders should be willing to lend you a percentage of your equity for home renovations. Depending on your situation, this equity could be accessed through redrawing, increasing your existing loan or refinancing your loan entirely. A home loan specialist from First Choice Home Loans QLD will be able to advise you on the best option.

Building loans

Most home loan providers will offer a product called a building or construction loan, which acts as a line of credit that you can draw on as renovation costs become due. The advantage of these are that you aren’t making repayments on the full value of the loan at once, but only on the progressive loan balance, which will change over time. That means you can start to pay off the first invoice before the next one comes in, saving you money overall.

Your broker at First Choice Home Loans can assist in checking with your lender on whether the loan is ‘interest only’ for an initial period. If it is, this will also help to keep your costs down during the crucial building period. If your lender doesn’t have a specific building loan, they may let you have a general line of credit, which functions similarly. Once the renovations are finished, the loan or line of credit can even be rolled into your home loan.

Personal loans

Especially where a renovation is small – perhaps you just want to update your kitchen without any building works – you might consider a personal loan. As personal loans are generally not secured against your property, the interest rates are usually higher. However, as the term of the loan is much shorter, you should pay less interest over time.

Each option has advantages, so it’s worth spending some time considering them carefully. Remember, your home loan specialist at First Choice Home Loans can always help you with any questions you might have.