Borrowing to Renovate - What you need to know
Once you’ve decided to renovate couples can spend hours trying to work out the costs benefits versus the actual costs and how much they might need to borrow. Our blog will attempt to demystify your options and the steps involved to get all the information you need.
Your motivation to renovate may be to add value to your property, add your style into your home or undertake much needed updates. Either way, where renovations happen, debt can often follow. The last thing you need is a money pit, so by working with your mortgage broker, you’ll find a solution that fits your future plans. Whilst we can’t assist you with forecasts on property values, we can help you reassess your current financial position, run through your plans, future payments, and decide if you can afford to take on the costs.
Cost Versus Value
Let’s start to investigate the what the average cost to renovate is. Firstly you can talk to your local real estate agent about house prices, average renovation costs and what the market in your area looks for. The general rule of thumb is to spend 5% of the cost of your house in the kitchen and 1.5% in the bathroom. According to realestate.com.au the average cost to renovate a kitchen alone is $12-$16k and for a bathroom it’s $9-12K. Anyone that’s watched the block will know that these rooms help to add value to a home. Other additions to consider would be to add another bedroom or an outside living space, such as a deck.
You may also want to consider using an interior designer or architect to help realise your dream home. Their cost is often a sliding scale percentage, based on the value of your build. As a guide, this tends to be 8-15% of the total construction cost. A good and honest designer will be able to work to your budget, however you need to be realistic about what you can get, for what you’re willing to pay... If a Development Application is required for council, you would be looking at about another $2k fee, plus any required consultants, such as a surveyor or hydraulic engineer. Builders costs are usually per square metre, depending on your specifications and you can get fixed quotes on this, once you know exactly what you need.
You may also need to factor in costs to move out of your apartment or house whilst renovations are happening. Some people also decide to project manage renovations themselves but don’t factor in how much time it takes and how much money they might be losing by being unable to work etc. I’d also recommend adding another 20% contingency buffer into your budget for anyone unknown costs. It’s rare for any renovation to go totally smoothly, to plan or to budget, so factoring this in from the beginning may save your sanity later on down the track.
A handy guide to costs is the; Rawlinson's Cost Guide this details project costs and is widely used by the construction and architectural industries.
Cost Versus Borrowing Power
Now you know what you’re looking to achieve, it’s time to look at you finance options. There are a few different loans that could help build on that dream.
1. Use your Equity
The equity is the difference between your home’s valuation and the amount you still have left to pay. Equity can build up because house prices have risen or due to how much you’ve already paid off your home loan. You need to bear in mind that you may have $100K built up in equity but your borrowing power might have changed - so you might not necessarily be able to carry that much more debt. Equity will still be based on how much you can afford to borrow.
2. Use your Redraw Facility
If you have a redraw available with your mortgage you may be able to utilise this money for your renovation. This option is not always available and doesn’t usually come with a fixed rate mortgage. Often your redraw amount will be listed in your internet banking.
3. Use a Line of Credit
The equity is the difference between your home’s valuation and the amount you still have left to pay. Equity can build up becuase house prices have risen or due to how much you’ve already paid off your home loan. You need to bear in mind that you may have $100K built up in equity but your borrowing power might have changed - so you might not necessarily be able to carry that much more debt. Equity will still be based on how much you can afford to borrow.
USE A LINE OF CREDIT
A simple way to access funds is by using a line of credit like our NAB Flexiplus Mortgage Facility. This type of finance lets you access funds as you need them, so you can pay for tradies or materials.
Interest is charged on the balance owed, rather than the total loan amount. There are no regular loan repayments. This means you’re responsible for keeping the account in order so your balance doesn’t exceed its limit.
If you choose this option the balance on your loan will increase. That means you pay more interest and your repayments are likely to increase.
APPLY FOR A PERSONAL LOAN
If you don’t have enough equity in your home, or you don’t have a redraw facility, then perhaps you could consider a NAB Personal Loan. They’re great to get smaller renovations underway, and you can apply for the loan once you have an estimated project cost. We offer personal loans from $5000, and the funds are deposited as a lump sum directly into your account.
Interest rates on personal loans are higher than home loans because they’re unsecured credit. The maximum loan term is seven years, so even though the interest rate is higher, the interest charged over the life of the loan will be lower. Also, be aware that your loan repayments are higher because the loan term is shorter.
CONSIDER A BUILDING AND CONSTRUCTION LOAN
If you've decided to renovate your home, then a building and construction loan (BICOE) could be the way to go. How do construction loans work? You receive your loan in increments, letting you pay invoices for the renovations as they come in.
Paying each bill as it comes in means you don't pay interest on your building costs until work's actually been done. This give you better cash flow.
Keep in mind that as you draw down more of your loan, the amount of interest you pay will start increasing. You'll need to budget for that.
Disclaimer
*This information is not to be relied upon without speaking to your finance broker, tax agent or financial adviser.
