Article by Mozo
Relaxing on your lounge sipping a glass of red you start thinking it’s about time we tear out that 1950’s kitchen and renovate, building a modern, more usable kitchen. Or maybe you start daydreaming about how a fresh coat of paint will brighten your living area. Regardless of how big or small your home renovation project may be you still need to find the funds to make it happen.
As we all know, nothing's for free! Good news though, there are plenty of options to finance your home renovation. The best way, will depend on your individual circumstances and financial situation. So sit back and continue to enjoy that wine while you learn about the top ways to fund your home renovation.
If you’ve been disciplined with your savings over the years then you may be lucky enough to have a stash of cash piled up to pay for your renovations. Cash is always your best option, as you avoid paying interest and amassing more debt. However renovations aren’t cheap, with a complete bathroom makeover costing up to $20,000 it’s going to take years and years to save up enough dosh to turn your dream into reality. So realistically, if you have cash, it will likely cover smaller projects like a new paint job or fitting a flyscreen door.
Given the many negative connotations with those pieces of plastic you keep in your wallet, you may not believe what you’re about to read! However, we are happy to advise that a low interest credit card is an option to consider to fund any small home renovation. So we’re talking about minor changes around the home and inexpensive DIY projects. These cards generally have interest rates of 14% p.a. or less with most providers offering up to 55 days interest free. Like all types of credit cards, it’s important to pay the balance off in full and on time each month to avoid penalties and interest.
After you’ve done up the costing for your home renovation you can apply for a personal loan, once approved you will receive a lump sum into your account and bang just like that your renos can get underway. There are a range of lenders out there who offer different types of personal loans and at the end of the day, it all comes down to which one suits your personal needs and financial situation. If you’re renovation is of a medium size, then consider an unsecured personal loan. This loan offers smaller borrowing amounts from around $5000 up to $30,000 for a loan term of 1-7 years but keep in mind interest rates can be high. For larger scale projects like building a new bedroom or redesigning a kitchen compare secured personal loans - interest rates are slightly lower than unsecured loans, borrowing amounts are higher and terms are longer. Personal loans do have lower interest rates than credit cards but are generally higher than mortgages.
If it’s big scale renovations you’re looking at undertaking than tapping into the loan of your property is a good option for financing the project. Taking out a home equity loan is the most common method Australians use to fund home renovations. Equity is the difference between the bank’s valuation of your house and the amount you still owe on your mortgage. For example, if your home is valued at $700,000 and your mortgage is $450,000 then you have $250,000 equity in your home. The bank won’t be kind enough to loan you the full amount but generally speaking you will be able to borrow up to 80% of the value of the home. So hopefully you have enough equity built up in your home loan to finance those much needed renovations!
Another way to fund renovations through your home loan is by refinancing your mortgage. It’s always a good idea to review your current home loan every few years and find a more competitive deal on the market with possibly a new lender. By refinancing your mortgage with a lower interest rate your monthly repayments decrease, saving yourself thousands of dollars that can ultimately go straight towards the renovations. This could mean adding a pool to your dream backyard! Click the link for some of the current refinance deals on the market.
If you’re considering a small renovation it could be worth your time and money to redraw on your home loan to fund the project. If you’ve made extra repayments on your home loan, a redraw facility (generally only available with variable rate loans) allows you to dip into the additional payments you’ve made. Keep in mind, not all home loans have a redraw option.
The final option for funding your home renovation is by using a line of credit. Once you’ve got equity in your property you can refinance with your current provider or a new lender to a line of credit loan. It works as a revolving loan facility that once setup you can access whenever you want. This can be in one big hit or stage by stage. For example, you may want to use a line of credit to pay builders as you go.