Article by Kelly Emmerton
Here’s a horror story you might have heard before: a young couple decide to renovate their new house. They choose new tiles, re-do the kitchen and knock out a wall. But halfway through pulling out the bathroom tub, their bank account runs dry. They head to the bank to borrow more money - and are rejected.
Now they’re broke and stuck with a half-demolished bathroom. Ahh!
To avoid this fate, it’s important to know the ins-and-outs of how your reno might affect your home loan, borrowing power and home insurance. We asked our property expert Steve Jovcevski to share some need-to-know insights, and came up with these 7 key questions you should be able to answer before bringing out the tool belt.
The answer to this should almost always be: yes. You may not need to let your lender know about a reno if it’s something minor - like a new coat of paint - or if you are 100% certain you have the necessary funds to finish the job. Otherwise, you should always let them know, just in case.
Why? Steve says a renovation can affect the value of your property, which will affect how much security the bank has over your loan. A good renovation can increase the value of your home - a bad or half-finished one can lower it.
“It’s really hard to refinance on a half built property, so if you’re doing a major reno, you may be stuck with one lender for the duration. That means it’s important to keep them on your side - the last thing you want is to be asking the bank for more money halfway through a project they don’t know anything about,” says Steve.
This will mostly come down to what kind of changes you want to make and how much it will cost. For example, if you’re repainting, you might pay for it out of your savings. If you’re re-doing the carpet, you might take out a personal loan.
For anything bigger than that, there are two main options, according to Steve. “First, you can talk to your bank about increasing your current home loan. Up to about $50,000, it shouldn’t be too hard to be approved and the good thing is it won’t affect your interest rate.”
The other option, good for if you’re taking on a major overhaul, is to take out a construction loan.
“This takes a bit more work. You have to have your plans approved, have quotes from a builder, be able to prove your financial capacity to pay back your mortgage and the construction loan,” says Steve. “You will also generally wind up with a higher interest rate on a construction loan.”
Uh-oh. So you’re halfway through gutting your bathroom or ripping a couple of walls out, and your renovation fund runs dry. Your first step is probably to approach the bank for more money - but unfortunately, a lender may be reluctant to give you any more funds, in case you can’t finish the job.
According to Steve, this puts you between a rock and a hard place. “If the bank won’t lend you more money, you’ve really got to think about damage control, and finding the funds to finish the job elsewhere - from family and friends, a personal loan or savings,” he says.
“Because if you really get stuck with a half-renovated house you can’t live in, you may have no choice but to sell - and you probably won’t get the best price under those circumstances.”
That’s why it’s vital to crunch the numbers on your renovation before you start, so you can be certain you’ll have the funds to see it through.
Your insurer may not technically need to know if you’re doing renovations, but like your home loan lender, it’s much better if you give them a heads up. Mainly, this is so you can double check what your policy covers and make sure your reno won’t mean a claim on your home insurance is rejected.
One of the big insurance considerations when you’re renovating is what level of cover you have for legal liability. If you’re still living in your home while doing a smaller reno, you should review your home insurance to make sure it offers adequate cover - and especially if it protects you from liability if someone gets hurt on site.
“One really important thing is to have a clear idea of whether your insurance will cover tradies being hurt while work is going on in your home, so you don’t wind up footing a big hospital bill if something goes wrong,” says Steve.
You may be covered under your current policy, you may be able to pay an extra premium for a higher level of cover while you renovate, or you might need to consider a different policy all together - but make sure you check before you start!
If you’re doing a major renovation, it’s vital that you make sure you have the appropriate insurance cover in place, and your home insurance policy may not cut it. This, Steve says, comes down to the size of the job, and whether or not you’ll still be living in your home while work is happening.
“For major jobs, usually above $20,000 worth of work, or anything you might need a Builder’s Licence for, you’ll need to have construction insurance, and you won’t be able to live in the property while working on it,” he says.
The good news is, if your renovation is big enough that you’re moving out of the property, you can replace your home insurance with a construction insurance policy for the duration - and avoid paying two premiums.
While you might save yourself some cash by handling a renovation yourself, Steve cautions would be home-tradies to make sure DIY work will be covered by your insurance.
“There are certain things, like waterproofing or electrical wiring that need to be done by a licensed professional. If you do them yourself, you probably won’t be covered by your insurance,” Steve says.
“Plus, if you’re after a construction loan to fund the work, the bank will want to approve a builder and DIY may not cut it.”
If you’re building your own home from the ground up, it’s even more important to make sure you look into what kind of checks and inspections you need to do throughout the building process.
“You don’t want to build an entire house, only to be told you can’t live in it because you didn’t have the foundations inspected and approved,” he says.
“And there’s no good way to inspect the foundations once a house has been built on top of them.”
Want to learn more about renovating your home? Check out our renovation guides section.Home renovation guides