There’s no shortage of renovation how-tos and shows – The Block and House Rules come to mind – but as much as we’d all love an all-expenses paid renovation to our beloved home, we’re 99% likely to foot the bill ourselves. So if you’re itching to renovate, what’s the best way of financing it? We break down the options.
Redrawing from your built-up equity is one tried and true method to finance a renovation. You gain quick access to your money; though you may be redrawing up to the amount you’re ahead on your mortgage payments. The downside is not all loans allow redraw facilities, and you could be hit with redraw fees. More repayments means more interest in the long-term, too.
If you’re in the market for a new loan, refinancing may be the way to raise money for your renovation. Refinancing with a new lender may give you perks like a lower overall interest rate or better features like an offset account. If you have high equity in your home, you could add additional funds or set up a line of credit. They will have lower interest rates than a personal loan. If you’re disciplined, you can also opt to pay off the loan as quickly as possible. Refinancing may also incur costs such as exit fees, so be wary.
A top-up mortgage is similar to a redraw or a refinance, however, grants you more funds than what’s available with either option. A lender will give you up to 80% of your home’s value in a top-up to spend on renovations (in most cases – ask your lender or broker.) If your home’s property value has gone up since you bought the property and you’ve made headway in paying off the equity, a top-up mortgage, with fees included, will be far less compared with a personal loan. Since you are borrowing more money, your repayments will go up. Your lender will also want an up to date valuation on the house, too.
“A top up mortgage is a popular way of funding a renovation, as the improvements in your home will only serve to increase its value,” says mortgage expert and Savvy CEO Bill Tsouvalas. “If you refinance and top-up, you could save more in additional interest.”
A personal loan
Taking out a personal loan is a quick and easy way to fund some types of renovation – adding a deck or a pool is one popular option. However, if you make deep structural changes to your property, chances are your bank will disapprove. Since loan terms on personal loans are shorter, the overall interest rate may also be lower by comparison. However, you’ll also pay an application fee.
There is a big temptation to spend up on the credit card for renos. If you have access to a zero-interest card, it might be a good option, however, some suppliers or contractors may not accept your credit card as payment. Making only the minimum payments will also slug you with massive interest (upwards of 17%p.a. on average.) There are definitely a lot of restrictions on credit cards, so be wary.