During the first three months of 2020 alone, Aussies spent close to $30 billion on renovations, according to the Australian Bureau of Statistics.
With the Government introducing the HomeBuilder scheme, which offers owner-occupiers a $25,000 grant to substantially renovate their home or build a new one, it is likely we may see an increase in home owners who are considering a renovation of sorts. However, the grant applies on renovations between $150,000-750,000 – a significant amount not everyone is willing to jump on.
When it comes to renovating, a construction loan may be the first option that comes in mind – but is this the right one for your situation – particularly if it is a small reno?
Construction loans are ideal for larger renovation projects, especially if you are knocking down and rebuilding part of your home or making structural changes. These loans work in a similar way to a credit card: your bank will approve your loan up to a certain amount, then you will be able to withdraw funds as you need them to complete renovations. In most cases, the loan is interest-only during the construction period and you will only pay interest on the funds you have accessed. To apply, you will need to have a comprehensive renovation contract, quotes, and a building plan.
If you are doing a small renovation, a construction loan may not be the most suitable option. Not only can it be more difficult to apply for than other forms of credit, but it often has minimum loan amounts of $50,000 to $75,000.
With that in mind, here are four ways to finance your small renovation.
Use a redraw facility. A redraw facility is a home loan feature that allows you to withdraw extra mortgage repayments you have made over and above the minimum required. By making these extra payments, you can ultimately reduce the interest on your home loan. If you already have a redraw facility, you may be able to access funds from it to put toward your renovation. If not, then refinancing to secure a redraw facility will provide flexibility for future withdrawals. However, it is important to keep in mind that not all home loans allow a redraw facility and there can be limitations around the amount of equity you can withdraw. Some lenders can also charge a fee per redraw and can limit the number of redraws you are able to make each year. Speak to your lender or mortgage broker about the limitations or fees your redraw facility could incur, to determine whether it is the most suitable option to help finance your renovation.
Refinance your mortgage. Refinancing your mortgage is the process of taking out another mortgage to pay off your current loan. If you have built up equity in your home, you could refinance and increase your home loan amount to access that equity. If you have been living in your home for several years or made many repayments on your mortgage, you may already have equity ready to use. If you decide access finance through refinancing, the bank will increase your loan amount and provide the equivalent amount of cash to use for renovations. While refinancing your mortgage can be a great option, it also means an increase in your home loan amount, repayments, and interest costs. There can also be fees involved for refinancing or exiting your existing loan.
Apply for a personal loan. Personal loans can be a suitable option, particularly for small renovations under $10,000. They can be easy to apply for and you could be approved and receive funds in as little as 24 hours. However, be wary of the higher interest rates that come with personal loans – interest rates can average nine per cent. It is also important to check the product disclosure statements before applying, as personal loans can also come with costly fees that can add up over time, such as account maintenance fees, and late payment fees.
Use a credit card – but be aware of the risks. Similar to personal loans, credit cards can be a relatively convenient option when it comes to smaller renovations. However, they also boast the highest interest of any financial product, with interest rates sitting at roughly 20 per cent. Ultimately, your credit card may not be the most appropriate choice for your renovation, as you will incur significant interest if you do not pay off your credit card bill for the month. If you do decide to use a credit card, look into low-interest options in the market and weigh up the pros and cons.
There are a myriad of ways to finance you home renovation. To decide what will work best for you, and to get an idea of the potential costs of your renovation, review all your options and consider the most suitable path for your situation, before applying.
For more information, visit Money.com.au