Simplifying finance for renovations

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There are a number of different ways to finance your renovations. Choose the right lender or plan, get the paperwork done early and your biggest headache will be choosing your paint colours; rose quartz or navy blue? But be warned, if you get your finances wrong, paint colours will be the very least of your worries.

The easiest way to fund your renovations is to borrow the funds against the equity in your property, ahead of the works being carried out.

The ‘equity’ in a property is the difference between the value of a property and the debt secured against it.

Generally speaking, you can borrow up to 80% of the value of the home. If the amount required for renovations is less than the available equity, then this is the path for you.

Here’s an example:

Home Value                $800,000
80% of Home Value   $640,000
Home Loan                 $350,000
Equity                         $450,000 ($800,000 – $350,000)
Equity avail to use     $290,000 ($640,000 – $350,000)

So as long the renovations are less than $290,000, this approach can work.
If you don’t have sufficient equity in the property, the next option is a construction loan; where you borrow based on the value of the property once the renovations are complete. Lenders will determine this value by looking at the plans and building contract or quotes for the project.

With a construction loan, the lender will also control the release of the funds. On major renovations, the lenders will require a fixed price building contract and make payments to the builder as each stage is completed. On small jobs, quotes from tradepersons (and proof works have been completed) will suffice.

The last finance option that suits small renovations on a tight time-frame is to pay for the works using a credit card or personal loan, then consolidate the debt into the home loan once the work is done (based on the increased value of your property) before interest costs mount up. This suits borrowers in a hurry that are doing the work themselves or are busy coordinating a number of trades people.

Once you’ve committed to a financial plan of attack for your renovation, there are three straight-up tips, that you can’t afford to ignore.

1. Make sure you only borrow what you can afford, both now and if rates go up by 2-3%. We can help work out your affordability and make sure any future considerations and long-term plans are incorporated in to the structure of your loan. Feel free to check out our online calculators to get a basis for loan repayments and the potential impact of increased rates.

2. If the renovations are major and would take anywhere from 3-12 months to complete, you might consider switching your loan to interest only for a year or two. During this period, your expenditure will be stretched most (rent and loan repayments) and you will want every spare dollar to pay for the renovations.

3. Avoid borrowing above 80% of the property price, so you can avoid Lenders Mortgage Insurance (LMI). It is a one off cost that you won’t see a benefit from in the way you will enjoy a new kitchen or outdoor deck.

Need straight-up and down advice on your finances before you take the renovation plunge? Get in touch with Tim from Hatch Financial Services on 03 9972 2241 or email tim@hatchfs.com. He’d love to chat!

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