The best way to fund your home renovation

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.

But renovations aren’t cheap, and 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. Realistically, cash will likely only cover smaller projects like a new paint job or fitting a flyscreen door.  

Advantages 

• No loans, no bank fees, no hefty interest rates

Disadvantages

• Save, save, save, every cent counts and it could take a decade to reach your savings goal by which stage you’ve decided you don’t want to renovate and would rather just sell!

A low interest credit card is another option to consider to fund any small home renovation (think 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.

Advantages

• Easy to apply and be approved for

• If you do your sums and stick to your budget you can finance the project without paying interest

• Convenient when it comes to purchasing home renovation products online

Disadvantages

• Annual card fee of around $60 and if you’re forgetful and pay your bill after the due date you’ll be hit will a late payment fee and interest

• There aren’t many rewards attached to a low interest credit card

If you know exactly how much your home renovation will cost, you can apply for a personal loan. Once approved you will receive a lump sum into your account and your renos can get underway.

There are a range of lenders out there who offer different types of personal loans, but at the end of the day it all comes down to which one suits your personal needs and financial situation.

If your 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.

Advantages

• Interest rates can be fixed for the duration of the loan, a big plus when it comes to budgeting

• Simple and cost-effective way to fund your home renovation

Disadvantages

• Beware of all the fees, from application to annual, make sure you read the fine print

Compare 140 personal loans from 43 banks to find the best deal to fund your home renovations

If it’s large scale renovations you’re considering undertaking then tapping into the loan of your property is another option for financing the project. This 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!

Advantages

• Interest rates on home equity loans are lower compared to personal loans or credit cards

Disadvantages

• You now have a larger mortgage, which means repayments increase and it will now take even longer to pay off

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 to a lower interest rate, your monthly repayments decrease, saving yourself thousands of dollars that can now go towards the renovations.

Advantages

• Enjoy a range of extra features designed to help you save money like offset accounts, extra repayments and split loan functions

• Read Mozo’s guide on refinancing tips and tricks

Disadvantages

• Warning, you may have to pay a couple of fees to refinance these include; an exit fee from your current lender, mortgage registration fee, application fee and valuation fee

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.

Advantages

• Better option than a personal loan, as the fee for redrawing is lower than paying interest on a personal loan that can often reach over 10%.

Disadvantages

• The hard work you’ve made through extra repayments has become obsolete and there may be a limit on the amount you can redraw

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.

Advantages

• Interest is only charged on the balance owed not on the total loan amount

Disadvantages

• You’ll be charged a higher interest rate compared to the standard variable rate available. and there’s also fees for using the facility