How to Choose the Right Renovation Loan for you

Renovating your home can be a wonderful investment, sometimes adding hundreds of thousands of dollars to its value. It can also be an immeasurable investment in your lifestyle and family dynamics. However, embarking on a home renovation project needs to be carefully considered. You need a comprehensive plan to ensure you’ll get the best value for the money you’re spending. Just as you need to put considerable research and planning into how to improve your home, you also need to do your homework on how best to pay for it.

Some people can spend years putting money aside for renovation projects. This can be an economical way to pay for minor works but saving for major projects can run the risk of materials and labour costs increasing at a much faster rate than any savings account balances.

For some renovations, it may be best to bite the bullet and embark on a major home transformation all in one project. If that’s the path you choose to go down, there are several funding options to consider.

Offset or redraw funds

Let’s start with the option that doesn’t involve taking on extra debt. Some home loans feature offset and redraw facilities that allow the borrower to build up funds in their home loan, or an account linked to it, that effectively reduce the amount they are paying interest on.

Under most offset and redraw home loans, the funds a homeowner pays over and above their regular home loan repayments can be accessed when they’re needed, according to the lender’s conditions. The benefit of using offset or redraw funds for major purchases is that you are effectively using your own money rather than going into more debt.

Using your own funds to improve the value of your home can be a worthwhile investment. But before you take the step, it’s advisable to understand how much extra interest you may be liable to pay over the long term and how much longer it may add to the life of your loan. Weigh up whether the investment is worth it in the longer term.

A home equity loan

Simply put, equity is how much of your home you actually own. A home equity loan allows you to borrow against that equity.

Let’s look at an example: you may have purchased your property for $500,000 but over the years, its value on the market has risen to $800,000. You may still have $250,000 to pay back on your loan but your raw equity in the property is now $550,000 – the $250,000 you’ve paid off your loan plus the $300,000 your home has increased in value.

A home equity loan is a popular way of financing renovations and is a good option for paying for larger scale projects. How much equity you can access will vary between lenders, but many will allow you to borrow up to 80% of the value of your home. Compared to other types of loans, home equity loans have generally lower interest rates and longer repayment periods.

Refinance your mortgage

Some homeowners regularly review their home loans every few years to ensure they are getting the best deal they can. Refinancing your loan can also be an option to fund a major renovation. Not only could it provide an opportunity for you to find a more competitive deal in the market, it can allow you restructure your loan to meet your financial needs during the renovation process.

Some lenders may even be offering cash back refinancing offers that can come in handy when you’re about to embark on a major project. Refinancing your home loan also offers lower interest rates than, say, a personal loan and, again, offers a longer repayment period. However, you need to do your homework. Sometimes the costs involved in refinancing your loan can outweigh the benefits of swapping over. Make sure you do your sums.

Take a construction loan

If you don’t have sufficient equity in your property, applying for a construction loan may be the best option. Construction loans are designed for borrowers building houses but can also be used to finance major renovation projects. These types of loans are similar to home equity loans, except the amount you can borrow against is not based on the equity in your home but the final value of your property post-renovation.

Many lenders who offer construction loans don’t give borrowers the full loan amount directly, but rather pay the amount progressively over the duration of the project. This means you’ll only make interest repayments on funds that have been drawn down, not the full amount up front.

Competitive construction loans

Here are some of the most competitive construction loans on the market.

Important Information and Comparison Rate Warning

Swipe your credit card

If you’re planning only minor renovations or perhaps a do-it-yourself project, a low-interest credit card could be the way to go. Aside from the convenience, credit cards are relatively easy to apply for and can make it easy to purchase upfront all the materials you need for your DIY project.

Credit cards allow you to pay off your purchases over time and also give you the flexibility to pay off the balance straight away - or when you are in a position to do so. If you need to repay your debt in instalments, ensure you have a low-interest card and pay your balance off in a timely manner.

Consider a personal loan

Another way to pay for small to medium-sized renovation projects is via a personal loan. For a minor renovation, you can consider an unsecured personal loan, usually up to $30,000. This type of loan, however, attracts a higher interest rate than a home loan and has a term of up to seven years.

If you are planning on a larger project – such as building an extra bedroom or landscaping – you could consider a secured personal loan. These types of personal loans are generally guaranteed by an asset, such as a newish vehicle or even a boat. Secured personal loans allow you borrow a higher amount, usually around $50,000 but up to $75,000 for some, and come with slightly lower interest rates than unsecured loans over a longer period of time.

Interest rates on personal loans can vary widely depending on the product, the terms, and your credit history. Generally, it’s best to investigate other avenues first.

Line of credit home loan

A line of credit home loan is like a revolving credit facility where you are approved to borrow up to a certain amount, can repay that amount, and then borrow it again numerous times. Such loans can be useful for paying for major purchases, including home renovations, at a home loan interest rate. However, these loans generally come with more stringent loan approval requirements than regular home loans. In recent times, line of credit loans have largely been usurped by home loans with offset and redraw facilities although are still available on the lending market.

How to compare home renovation loans

1. Decide how much money you need

Plan carefully. It pays to have your project plans drawn up and costed so you have the big picture of what expenses you will be up for. Consider carefully what changes to your home will add maximum value, both to your property as well as in lifestyle terms. Don’t get too carried away with extra touches and flourishes. Costs can blow out rapidly.

Anyone who’s been through a renovation will tell you to also allow for unexpected or unforeseen costs. Make sure you add a decent buffer to your costings to be safe.

Before you take the plunge, you should also assess your own financial health before going down the path of taking on more debt. Remember, any plans you have drawn up can always wait until you are in a better financial position.

2. Find a loan type that matches your needs

Financing your dream renovation is exciting, but before you dive in, it's wise to arm yourself with knowledge. Understanding your financial options is crucial, but it's only half the battle. You also need to compare these options and see which one best suits your needs and financial situation.

Ultimately, the best choice for you depends on your specific circumstances. Weigh the pros and cons of each option carefully. Consider factors like the total cost of the renovation, your current financial situation, and your risk tolerance. If you're feeling overwhelmed by the numbers, don't hesitate to seek help from a professional if you need it. A mortgage broker or financial advisor can be a valuable resource

3. Decide if you can manage the costs and repayments

The average Aussie spends between $10,000 and $45,000 on a kitchen reno, depending on the project's length. But that's not the only cost to consider when taking out a renovation loan.

Loan costs go beyond the headline rate. Be sure to factor in ongoing fees, interest rates, and any associated charges. The good news is many loans offer flexible repayment options to fit your budget. Weekly, fortnightly, and monthly payments are common choices.

Want to estimate your monthly repayments? Loan calculators are your friend. They give you a clear picture of how much you'll owe each month. This will help you determine the best loan amount for your project without blowing your budget.

4. Are the renovations worth the financial investment?

Researching if your renovations will pay off in the future can save you some headaches. Experts say a well-planned renovation can add up to 10% to your home's value, but only if you hold onto it for at least five years.

Sure, you want your home to reflect your style, but some upgrades have broader appeal. Think about features that would make your home more attractive to future buyers, like modern kitchens or updated bathrooms.

Not everyone has the magic money tree for a big renovation loan. That's where DIY projects come in. Tackling smaller projects yourself can save a lot of money. But remember, if it involves hidden stuff behind walls, call in a professional.

What is a home renovation loan?

Technically, there is no such thing as a ‘home renovation loan’. However, there are ways you can use the equity in your home to finance your renovation. A construction loan is probably the closest thing there is on the market to a dedicated ‘renovation loan’ product as this loan allows you to make major changes and renovations to your home.

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