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Using your current home loan for new renovations

By Canfan 13 November 2017 0

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If you love where you live but have either outgrown your home or it no longer meets your needs, renovating could be a great alternative to selling up and moving somewhere else.

But if you’ve never renovated before, you’d be forgiven if you feel completely in the dark about how best to finance the project. Using your current home loan could be the easiest way to fund it, but there are a few things to think about before you jump straight into your renovations.

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Define what you want to do

The first step in any renovation project is to clearly define exactly what you want to do.

How you approach this will depending on the scale and complexity of your renovations, but a good place to start is by jotting down a list of the key features you want or even a basic sketch of what you want. This will make the conversations you have with tradies a lot easier when the time comes to get quotes.

It’s also a good idea to focus on renovations that are going to add value to your home. Doing a little research about what’s happening in your local real estate market can be a very valuable exercise when renovating. Are single level homes selling better than double-storey homes? What’s the difference in the sale price of houses with one bathroom compared to two? Is the cost of adding a fourth bedroom likely to add enough value to justify the cost?

Having this sort of knowledge about what other buyers in the area are looking for could be invaluable when deciding on what’s going to add value to your home.

As a general rule, you should try not to spend any more than 5 per cent of the value of your property on your renovations to make sure you can recoup your costs if you need to sell up.

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Get an idea of how much it will cost

Once you’ve defined the scope of your renovations and want to get a picture of how much they’re likely to cost, a good place to start is by asking any family or friends who have done similar projects how much it cost them. While there may be a range of factors that make your renovations different, it’s a good way to get a ball-park idea of how much it’s likely to cost before you start speaking to tradies. They may even be able to recommend some good contacts!

Once you’re ready to start contacting builders, plumbers, electricians, plasterers or painters, the golden rule of ‘three quotes’ is a good approach to ensure you get a realistic idea of costs and don’t get ripped off.

If you’re planning renovations on a larger scale and require the help of a home extension company, they should be able to provide you with a cost estimate with the option to opt out of the agreement if preliminary works uncover issues which will lead to significantly higher renovation costs.

Work out how to finance it

Now you have a clear idea of what you want to do and how much it’s likely to cost, you’ll need to get your finances sorted. Unfortunately, there’s no one-size-fits-all approach to financing renovations.

If you can, using the redraw (or the amount you’ve overpaid) on your current home loan is generally the easiest way to fund your renovations. However, this will only work if you have enough available funds to cover the cost of the renovations and your current home loan allows it. For example, if your current loan is a fixed rate home loan, you won’t have a redraw option and will need to look at other finance options.

Another thing to be aware of is if you use your redraw, it will increase the overall balance of your current loan and your monthly repayments will also likely increase.

If using the redraw on your current loan isn’t a suitable option for you, here are a few more options you could consider:

  • Use the equity in your home with a home equity loan: The amount of equity you have is basically the difference between how much your home is worth and how much you still owe on your mortgage. Generally, you should be able to borrow around 75% of the value of the equity you have in your home with a home equity loan.
  • Use the equity in your home with a line of credit: Similar to a home equity loan, a line of credit uses the equity you have in your home to access funds for your renovations when you need them, however the key differences are that interest is charged on the balance owed rather that the total loan amount and there aren’t any regular loan repayments. When you opt for a line of credit to fund your renovations, your lender can essentially cancel the credit limit at any time and demand you immediately repay the full amount owing, so it’s important you really work out if it’s the right type of finance for you before you commit to it.
  • Refinance your existing loan: Refinancing your current loan and consolidating any other debts you have could be another option if you want to simplify your finances and free up space on your credit cards to fund the renovations.
  • Apply for a personal loan: While generally not an ideal option, if you don’t have enough redraw or equity in your home loan available to use, a personal loan could be another option where you’ll get access to a lump sum of cash to fund your renovations.
  • A building and construction loan: If you’re planning renovations on a larger scale, a building and construction loan could be another option. With these loans, funds are released to you progressively throughout the various stages of the build, so you only start paying interest on the funds once you use them. They can also give you better control over the total cost of the project, but there are a few conditions with these loans so it’s important you really work out if it’s a suitable option for you.

With so many finance options on the market, the best way to work out the most appropriate way to finance your renovations is to speak to a mortgage broker to discuss the range of options that could be suitable for you.

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