We need do to Renos! Should I Refinance To Renovate?
You need to renovate and you know that a renovation to your home will improve your living standards as well as adding a big increase in your property value, but you can’t afford it. Refinancing is an option but there are many pros and cons to consider beforehand.
Although this sounds straightforward, it is more complex than you think. Delving directly into the loan without due consideration of the type of renovation proposed, could considerably leave you in peril. Hence if you choose the wrong loan, you may be left with a pile of unexpected debts.
Know Your Budget
One primary thing to consider prior to refinancing is your budget.
If you underrate your budget, you run the risk of getting knocked back from your lender, according to an MFAA accredited finance broker.
“I know a lot of homeowners who have estimated approximately $100,000 for a loan only to discover that the renovation costs more.” The broker says
This means you may have to do something, which most banks don’t like, that is reapplying for a larger sum.
It is therefore advisable to be cautious in your projections. If you believe you need $100,000, I’d recommend applying for $150,000 just in case, if you can afford it of course. The key is stick to your budget, adds the broker.
Your next move is to speak to your broker to determine which loan will suit your needs and objectives.
Line Of Credit Loan (Home Equity Loan)
A line of Credit Loan is also known as a Home Equity Loan. To be eligible for this loan you must be making upgrades to the “cosmetics” of the property.
Renos that fall under the line of credit loan can include things like installing a new bathroom or kitchen, painting the interior or exterior of the house and other basic constructions.
More often than not, these renovations do not replace the costs of structural changes, homeowners can call up to 80% of their loans to value ratio (LVR).
A line of credit loan is a “revolving door” of credit that combines your home loan, daily spending and savings into one loan.
To calculate the value you can borrow, subtract your current loan balance from your property value and then multiply by 80 per cent. For example, if your property is worth $500,000, and you have $250,000 left on your loan, your home equity is $250,000. You then multiply this total by 80 per cent. If you are however uncertain as to the value of your home, contact an MFAA finance broker who would help you arrange for an appraisal or valuation. For MFAA calculators, click here.
If you choose home equity loan, it essentially works as a large credit card. You can use it to purchase cars, cosmetic renovations and other investments. Be that as it may, the interest-only charge starts when the equity is drawn down.
Take note of the fact that, line of credit loans provide you with money that can gather interest quickly, so if you are ill disciplined with payments or money, speak to an MFAA finance broker for a plan that matches your unique circumstances.
If you are adding a new room, or changing the roof, these are structural changes to your home, a constructive loan would therefore be suitable for you.
Construction loans give homeowners the opportunity to access larger sums of money, with the amount dependent upon the expected value of the property after renovations are completed.
What makes a construction loan even better is that it is calculated on the outstanding amount, and not on the borrowed amount. This therefore implies you have more money available in your kitty, but you actually pay interest only on what you choose to spend. As a result the broker may advice you to apply for just one loan, while leaving enough leeway in your borrowed kitty.
When applying for a construction loan, council approval and a fixed price-building contract are required, an aspect, which an MFAA finance broker can assist with, to reduce the paper work.
Your lender will appoint an assessor to value your construction at each stage of the renovation. This will happen before you pay your instalment. When construction is complete, speak to your mortgage broker, as you may be able to refinance back to the loan of your choice.
Taking a look at both these loans, the broker says consumers can call on other property they own to boost their overall borrowing amount if they wish.
“Depending on the client, they can use other property to get a line of credit and a construction loan. Or they might get a typical construction loan if there is going to be an extensive framework change on the building,” the broker says.
What you need do is speak to a broker who would help you figure out the loan that is ideal for you from the options you seek. This advice is essential because a poorly planned construction loan would cost you more down the road.
“Consumers should ask their broker, ‘What type of loan am I eligible for?’ because if you don’t get your construction loan right, you may be jeopardising your bank security,” the broker says.
While these specific options can be discussed with your broker, if they aren’t suitable, there may be other options available to you. Speak to an MFAA Accredited Finance Broker to make your grand renovation plans a reality.
Talk to us today and we will help you with all your home loan needs.
*This information is not to be relied upon without speaking to your finance broker, tax agent or financial adviser.
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