How to finance a home renovation

Explore what finance options are available before planning a renovation.

As your lifestyle changes, so does your home.

Often a home renovation is triggered by a family expanding, general upkeep of the home, the desire to change the layout or design and to add value to the property.

Whether you’re planning to do the renovations as a DIY project or you’re engaging a builder or other tradespeople – a renovation is going to cost you.

RACQ Bank Manager Regional Lending Chris Betts says it’s important for homeowners to consider the reasons why they are renovating, understand the costs involved and have a clear end goal.

“Renovations are often about personal lifestyle choices and do not always result in an increase in property value” Mr Betts said.

“If your property has a home loan against it, your lender will want to know if you are doing significant changes to the property, for example raising a house to build underneath, adding rooms or changing the roof line.

“These types of renovations may need council approval and it may also be a condition of your lending to inform your bank of any significant, structural renovation plans - you may need the bank’s consent to undertake renovations while your home has a loan against it. 

“If you need advice on financing a home renovation, contact your lending specialist before you start the project to avoid any issues down the track.”

Here are four different ways you can finance a home renovation.

Save for it

If time is not a constraint, saving for the renovation will lower the cost as you won’t have to pay interest on borrowed funds. Understand the costs involved with your home renovation plans and determine what work you can do and what you will need to outsource to a builder or contractor. Do your research on how much it is going to cost and obtain quotes from a few different companies. It’s always recommended to shop around first. A good rule of thumb is to allow 10-15% in your budget for cost overruns.

Make a redraw on your mortgage

This option does not involve obtaining a new loan and can often be the most cost-effective method if you’re not able to use savings to pay for the renovation. Talk to your lender to understand the terms and conditions of redrawing on your mortgage and check whether any redraw fees will be charged upfront.

Refinance/add loan

 If you don’t have enough savings to pay for the renovation, then adding to your existing loan (refinancing) or doing a separate home loan on the side is another option.

The renovation may add value to your property and the bank may be able to lend based on the improved valuation prior to completion. This is sometimes referred to as a construction loan. Things to consider if applying for a construction loan include:

  • The renovation may require Council approval of the proposed plans.
  • Bank lending requirements strongly favour renovations to be carried out by qualified tradespeople, rather than DIY because banks view this as a less risky model.  It is often the simplest way to get a “Tentative on Complete Valuation” which enables the homeowner to borrow against the completed value of the renovated home, rather than the existing value of the home.

It is important to be aware that increasing the amount of your mortgage will impact your Loan to Value Ratio (LVR).  Lenders often require that homeowners pay for lenders mortgage insurance (LMI) if the LVR goes above 80%.

Take out a personal loan

Personal loans will generally have higher interest rates than mortgages. Homeowners may consider this option when using their mortgage to fund the renovations would impact the LVR and result in their lender requiring LMI as discussed above and the interest cost of the personal loan is less than the LMI premium. Engage with your lending specialist to understand the best option for you.  

Planning a home extension? Here are some tips on how to avoid costly traps when planning the renovation.

 

The information in this article has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in the document is general advice and does not take into account any person’s particular investment objectives, financial situation or needs. Before acting on anything based on this advice you should consider its appropriateness to you, having regard to your objectives, financial situations and needs.