Written by One of the best ways to increase your equity in a property can be to renovate. Some homeowners plan to do that as soon as they buy a new house, while others decide to make some home improvements part way through an existing mortgage. Whichever group you fall into, there’s a renovation loan option for you. When you’re looking to undertake work on your home, you might have various motives. Some people are looking to make a profit and climb a little further up the property ladder, and others might see staying put as a better option than moving. No matter what the reason, it’s essential to find a cost-effective way to finance home improvements, and that’s where Savvy can help. We match thousands of homeowners with their ideal lender each year, based on how much they need to borrow, their circumstances, and where they want to get.
How does a renovation loan work?
Renovation loans work much the same way as any other type of unsecured personal finance. You borrow a fixed amount, usually over a period of five years, and you pay a fixed rate of interest.
You make regular payments, which don’t change over the course of the loan. When your final payment is done, so is your loan.
Qualifying for a renovation loan is pretty straightforward. Lenders look at your personal finances and figure out your disposable income to see if you can afford repayments. They’ll also check how long you’ve worked for your current employer.
Is it cheaper to use the equity in my house?
That depends, and it’s rarely the best option. Now, that might sound counter-intuitive to some people because if you compare home loan interest rates, they’re usually far cheaper than personal finance, but there’s the time factor to consider. Home renovation is a relatively short-term commitment – it just doesn’t take that long to complete when compared to a twenty-five or thirty-year home loan.
The trouble with adding the cost of a renovation to your mortgage is that you end up paying a heck of a lot of interest over the course of the loan. While that makes perfect sense on a six or seven-figure house purchase, it looks less viable when you’re considering a home reno. When you refinance a mortgage, you can also pay hefty break fees too.
Let’s look at the repayment implications of borrowing for a bathroom renovation using home loans and standard unsecured personal loans. We’ll assume you plan to refurbish the room at the cost of $8,000:
| Method | Interest Rate | Term | Total interest | Total cost |
|---|---|---|---|---|
|
Mortgage |
4% |
30yrs |
$7,462 |
$15,462 |
|
Reno Loan |
15% |
5yrs |
$3,419 |
$11,419 |
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To renovate or not to renovate: the costs and the gains
Cost Larger Renovations on a Per-metre Basis
If you plan to renovate the whole house or a large chunk of it, expect things to add up quickly. Tradies aren’t cheap, and neither are quality materials. When you borrow, remember to average the cost of a major reno on a per metre basis. When it comes down to that, you could be looking at upwards of $3,000.
It’s Hot in the Kitchen
Kitchens provide one of the best returns for renovators – yielding up to 500%, but they don’t come cheap. You’ll need to speculate to accumulate, and even a smaller area will set you back five figures. Make sure to borrow enough to cover that.
Watch Where You Step
When it comes to home renovations, you won’t put a foot wrong if you replace worn-out flooring—improving how your floors look can pay for itself several times over. That goes for whether you plan to sell up or stay on.
Add Some Convenience
You only have to take a quick look at property prices to know that more bathrooms equal more dollars. Whereas we used to build houses with just one convenience, we now expect at least a couple of bathrooms. Adding an extra option can bring quick returns or claw back some equity fast.
Paving the Way to More Equity
You shouldn’t overlook the outdoors when it comes to improving your home. Putting in some work here can create extra living spaces and a great first impression if you decide to sell. Decking and paving can be pretty pricey, however. Expect to pay over $1,500 a square metre, so borrow accordingly.
Set the Scene for Gains
Landscaping is a great way to improve the kerbside appeal of a property. If your reno will take a few years, or if you don’t plan on moving immediately, you can buy smaller plants and then literally sit back and watch as your equity grows. Lawns are a great way to add value in terms of comfort or profit – you can lay up to sixty square metres for just $750. Beware, though; if you want magazine-quality landscaping, you can expect to pay up to $1,000 per square metre.
More of your questions about renovation loans
You don’t. There’s no requirement to make a down payment for a renovation loan, and you can borrow up to 100% of the cost of home improvements.
You can use a reno loan to pay for any element of improving your home. Whether you need a kitchen loan, finance for a bathroom or a loan for landscaping.
You can repay a renovation loan over anything between just one or five years. Payment schedules are flexible and you can choose an option that suits the way you get paid – whether than be weekly, fortnightly or monthly.
How much you can borrow will depend on your past credit history, your income, and how much you spend on monthly expenses and any existing financial commitments like your mortgage.
Most lenders will consider a broad range of employment types when they assess a loan. Reno loans for self-employed homeowners are usually relatively quick to arrange, and you’ll likely be able to prove your income by granting read-only access to your bank statements. It’s also a good idea to have income tax returns ready, just in case.
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