How to finance your renovation

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-conditioning. There are a few options when it comes to paying for your home renovation, and it really depends on the size of the project and your budget.

Ways to pay for a renovation:

Equity
Construction loan
Refinancing
Personal loan
Credit card
Savings

 

Equity

Equity is the difference between your home’s market value and what you owe on your home loan – and it could be used to pay for those renovations. Here’s how.

Increase your current home loan or open a new (smaller) home loan

You may be able to increase your home loan amount. A Home Finance Manager could talk you through what’s possible, as well as arrange it for you. Make sure you’re comfortable with any changes to your loan repayments before you decide to increase your home loan amount, as well as any potential fees and charges.

Redraw your extra home loan repayments

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 - to pay for home improvements.

Construction loan

Making any structural changes to your home? Before you knock out that wall, you might consider applying for a construction loan.

Payments from the bank are progressively released to the builder as they complete various stages of the renovation. This helps to monitor the progress of the renovation and means you don’t have to worry about paying 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.

Refinance

Reviewing your home loan to see if you could save money or borrow more funds to pay for your renovation can be a good reason to think about refinancing.

Find out what it means to refinance and the reasons to refinance your mortgage.

Personal loan

Depending on the size of your renovation and your savings account, you may not need to borrow a lot of money. You could consider a personal loan, as you can usually borrow a smaller minimum amount than you could if you were increasing your home loan amount. There are generally two standard options when it comes to personal loans – secured and unsecured.

A secured loan lets you use an asset – generally a car or motorcycle– as security for the loan. It often has a lower interest rate than an unsecured loan.

With no security needed, an unsecured personal loan can be a bit quicker and easier to set up. The minimum loan amount is often lower than secured personal loans and home loans, so if your renovations are only small this could be an option for you.

Credit card

Perhaps you just want to, say, get an alarm system fitted. In other words, a relatively small purchase that you can have installed quite quickly. A credit card can be a convenient option for the smaller purchases when it comes to renovating your home, but still allows you to pay the purchases off over time. You may even be able to pay purchases off in instalments.

A low rate credit card may suit if you plan to pay the balance off gradually, so that you pay less in 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.

Savings

If you have a savings stash that you can tap into to finance your renovation, then you could save yourself on interest in the long run. However, there are a few things to consider.

Firstly, is your savings account offsetting your mortgage? If your savings are in an offset account, make sure you calculate the difference in mortgage repayments if you have less money offsetting your home loan.

Also, it can be handy to always have an emergency fund for unexpected expenses like a broken down car. During your renovation, make sure that you have a plan to fund the unexpected. That might be having a credit card ready or making sure you have money in your savings account.

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Things you should know 

The information contained in this article is of a general nature and is not intended to be nor should it be considered as professional advice. You should not act on the basis of anything contained in this article without first obtaining specific professional advice. Also to the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL/Australian credit licence 234945, its related bodies corporate, employees and contractors accept no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this article.