So, you've decided it's time to finally re-do your kitchen and, while you're at it, you could really do with air-con. There are a few ways to pay for home renovations, and it really depends on the size of the project and your budget. Here are some options to consider.
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If you have a savings stash you can dip into to finance your renovation, you could avoid borrowing money and could save on interest in the long run. However, there are a couple of things to think about.
Firstly, is your savings account offsetting your mortgage? If your savings are in an offset account, make sure you know the difference in mortgage repayments to understand the impact if you have less money offsetting your home loan.
Also, it can be handy to have an emergency fund for unexpected expenses, like additional renovation costs or a broken-down car. It’s good to have money set aside, or a credit card in your pocket just in case.
Equity is the difference between your property’s market value and what you owe on your home loan. You may be able to increase your home loan limit if there's equity available.
By increasing your home loan, you can access funds for the renovation while still maintaining one loan and repayment. Make sure you're comfortable with any changes to your home loan repayments before you decide to increase your home loan amount, as well as any potential fees and charges.
Depending on the size of your renovation and your savings balance, you might need to borrow money. A personal loan for home improvements usually has a lower minimum loan amount than the minimum required to apply for a home loan increase or construction loan.
There are generally two standard options when it comes to personal loans – secured and unsecured.
Making structural changes (like knocking down walls and adding rooms) to your home? This is where a construction loan might be right for you.
Construction loans work a little differently to regular home loans. As the builders complete various stages of the renovation, payments from the bank are progressively released to the builder. This helps to monitor the progress of the renovation and means you don’t have to worry about managing payments to the builder directly. You make interest only repayments on your loan until the renovation is finished, which means you could have some extra cash handy during the construction period.
Once the renovation is complete, you can start making repayments on both the principal (loan amount) and interest, or you can continue to pay interest only for a period of up to five years.
If you’re in the planning phase and not ready to start your project just yet, then it might be better to review your current home loan and see if you could save instead. It might be a good time to check if you’re getting the most out of your home loan and if there’s an opportunity to refinance. Find out what it means to refinance and the reasons to refinance your mortgage.
If you make mortgage repayments over and above the minimum required, this money builds up in surplus. If your home loan allows, you could take this money back out – also known as redraw.
Depending on the redraw facility, you could access surplus funds completely online or by submitting an application. It’s also good to keep in mind that once surplus funds are taken out of a home loan, you’ll be paying more in interest.
If you’re only planning to do minor updates to your home (like getting an alarm system or adding a fresh coat of paint) a credit card could be a convenient option for those smaller purchases. It allows you to pay purchases off over time and you could even repay in Easy Instalments.
If you plan to pay the balance of the credit card gradually, then a low rate credit card might suit your situation as it means you pay less interest. If you think you’ll pay the balance off straight away, you might want to consider a card with no annual fee or one that lets you earn points.
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