What are my options for financing home improvement projects?

Are you thinking about doing some much-needed home renovation? It’s an exciting process, but one that you need to prepare for.

Whether you’re considering completely redecorating your entire home or just want a couple of minor improvements, the cost of your reno depends on various factors, such as the extent of the work and your budget.

If this project is something you’ve been setting money aside for, that’s great! But if you’re looking for other ways to finance your renovations, there are some great options, such as a personal loan or using your home equity.

What is home equity and how does it work?

Home equity is the difference between your home’s current market value and the outstanding balance on your mortgage. It is the value of the portion of your home that you own.

For example, if you have a $150,000 balance on a mortgage on a property worth $500,000, then you have $350,000 of home equity.

The more of your mortgage that you pay off, the higher your home equity. Similarly, if the value of your property increases, your equity will too, while it decreases if the value drops.

How can I use home equity to fund a renovation?

Having a good amount of equity can be a real asset for homeowners, as you can utilise it in a lot of ways.

It’s common to use your home equity to get a home equity loan, where you borrow against the equity you have built up. You can get a line of credit with a limit based on your equity that you then pay interest on. If your mortgage has a redraw facility, you can also draw upon any additional payments you have made. You can then use this cash to purchase another property, a car or even renovate your home.

There are some potential risks to a home equity loan or line of credit, as you are taking on additional debt with your home as collateral. If you use your equity loan for renovations, make sure that you can afford the repayments and that you don’t overcapitalise. You don’t want the loans you have over the home to be worth more than the home itself

Can I use a personal loan for a home renovation?

If you don’t have much home equity or are looking for another option to fund your home improvement project, you could consider a personal loan. A personal loan can help you cover the cost of your renovations while also spreading the payments over a long period.

How do I choose a personal loan?

You have two choices when choosing a renovation personal loan: secured vs unsecured and fixed vs variable.

According to the Mozo database, the average secured personal loan interest rate is 7.54%, while the unsecured rate is higher at 9.53%.

A secured personal loan requires collateral to be put against it (such as your home or car), making it a lower risk for the lender, and thus, a lower rate. Alternatively, an unsecured loan often has a higher interest rate but does not require any assets as security.

When considering a fixed rate personal loan vs a variable rate, you have to consider what works best for you.

Fixed rate loans let you know exactly how much you will be paying for the entirety of the loan. Sometimes, this can mean that they are more inflexible and have high fees for early repayment.

A variable loan rate changes with the market - so there are risks to consider. While the rate can go down, your lender can also hike it up at any time. That said, these loans usually come with more flexible payment options and free early repayments.

Want more on all things personal loans? Head over to our personal loans hub for guides and comparisons!