Home truths

If you need a bigger house, renovating rather than moving can be the cheaper option.

Family situations are dynamic. A new baby, or even a new hobby, may mean that you need to upgrade your home. The big question is – move or renovate?

Either option could involve hassles, but my suggestion is to renovate if possible. Selling one house and buying another could well cost you nearly 10%  of the price of the new purchase. For example, if you sell a home for $600,000 and buy another for $900,000, you could be up for $90,000 in expenses such as agent’s commission, legal fees and stamp duty, loan fees and removal costs.

If you decide to renovate, beware of overcapitalising – this means you spend so much that your home becomes far more expensive than others in your neighbourhood. Avoid this by obtaining an appraisal of your home’s value. If its current price, plus the renovations, does not exceed the average price in the street, overcapitalising should not be a problem. If your house is worth $600,000 and the average price in the street is $800,000, you could safely spend $200,000 on renovations.

Next have a building inspection to ensure your home is structurally sound, and a check survey to ensure the boundary pegs are in the right position.

Be sure you can afford the repayments on the loan you will have when then job is finished.

Research your intended builder thoroughly, because if you are unfortunate enough to strike an incompetent or insolvent one, you could find yourself with big problems. A slow builder means you could be paying both rent and mortgage payments for many months more than you budgeted, but worst of all is a builder who goes broke in the middle of a job.

A good builder will be happy to give you the names of people for whom jobs have recently been completed. Take the time to visit some of them to check the quality of the work and if the job was done on time and on budget.

It’s important to get the finance right, too. The first step is to be sure that you can afford the repayments on the loan you will have when the job is finished. To do this, add the cost of the renovations to the existing loan balance, ensuring you make adequate allowance for extras such as landscaping. Then do a budget based on repayments of $7 per thousand per month.

For example, if your total loan will be $200,000 on completion, budget for repayments of $1400 a month. This may be more than the lender will require, but it will give you a buffer to protect you from future interest rate rises.

If you have sufficient equity in your home, I suggest you start with a line of credit loan, on an interest-only basis. This will allow you to draw it down as progress payments come due.

The appropriate loan once the building is completed is a principal and interest loan, where you are required to pay it back. After all, you don’t want to let your dynamic family situation keep you in debt for too long.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and our readers should seek their own professional advice before making any financial decisions.