Finance advice

How To Finance For Your Home Renovations

By Neil Carstairs

Have you been meaning to get that new kitchen or extension to spruce up (and add value) to your home but you’re simply short of funds?

SPONSORED BY Blogger: Neil Carstairs, Director & Senior Lending Specialist, Mortgage Corp 

If your savings or extra repayments in your mortgage offset account aren’t enough to cover the cost of a major renovation – don’t fear, there’s another option available to you.

Refinance your home for renovations

Many banks are happy to refinance your mortgage for renovations using either:

  • Your home’s existing value; or
  • An improved home value (called on completion value)

In this post, I’m going to cover what each of these refinancing options means for you and how you can get the most out of them.  Stop putting off your renovations TODAY!

 

When to use your home’s existing value  

Refinancing using your existing equity means that the current value of your home is used by the bank to determine how much you can borrow.

Using your own equity is suitable for smaller projects such as new kitchens and bathrooms, landscaping and painting – generally projects that cost $100,000 or less.

Here’s an example of how it works:

  • Say you have $50,000 in your mortgage offset account
  • You currently owe the bank $450,000 but your home is worth $600,000
  • If you refinance your mortgage to 80% of your home’s value, this means you can now borrow up to $480,000, meaning you can borrow an additional $30,000
  • Combined with your existing savings of $50,000, you would have $80,000 to use towards your renovations

 

Benefit of using your home’s existing value

The main benefit of using your existing equity is that the bank will normally refinance without you needing to provide lots of paperwork – this is usually a fairly quick process so you can start your renovations sooner!

 

Pitfalls to watch out for

The main disadvantage with this approach is that you are limited by your home’s existing value.  If you wanted to borrow more than 80% of the value of your home, you would need to pay Lenders Mortgage Insurance (LMI).

Because you’re limited in how much you can borrow, it’s tempting to keep the costs of renovating down.  This means you might skip on a building contract and DIY instead. If you’re not experienced, this can lead to all sorts of problems – such as time and cost blow outs, issues with tradies and worst of all, no insurance cover if things go wrong.  Tread carefully if you plan to DIY!

 

When should you use an on completion value?

Refinancing using an on completion value means that the bank will assess the value of your home after renovations when deciding how much to lend to you. This means you can borrow more than simply if you used your home’s existing value.

Using an on completion value is suitable for structural or major improvements such as extensions, adding storeys or adding rooms – generally projects that cost $100,000 or more and which also add more value to your property.

If we continue with the example above:

  • Say you wanted to add a new kitchen and another bedroom with ensuite for a total cost of $180,000
  • In the first example, you would have only been able to borrow an additional $30,000 before paying LMI
  • Based on comparable sales, you NEW home value would be worth $800,000 after renovations instead of $600,000
  • If you refinance using an on completion value, you can now borrow up to $640,000 without attracting LMI
  • This means you can borrow an additional $190,000 – more than enough to cover your renovations without you needing to even dip into your savings!

 

What you need in order to use an improved home value

Whilst you can borrow more under this approach, the process with the bank is a little more involved.  You would need a fixed price building contract with a qualified and insured builder for the renovations in order to get the bank’s approval. And of course approved plans and drawings done (usually the builder/architect arranges this)

On first glance, this might cost more than a DIY job.  However this gives you the security of:

  • Fixed costs;
  • More certain timing; and
  • Builder’s insurance if it all goes wrong.

The right approach is key

The key to a smooth renovation is to plan appropriately and to not jump in without preparation.  Plan for not only the building requirements but also for your finances.  Speak to an experienced Mortgage broker and let them help you structure your mortgage for long term investment success

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FROM THE WEB

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In this episode of the Smart Property Investment Show, Dominique Grubisa joins host Phil Tarrant to share her personal story which saw her hit rock bottom with excessive debt during the GFC.

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Dominique unpacks how, by relying on her background in law, she was able to overcome that debt and in doing so develop a unique investment strategy which she believes many can utilise today.

Dominique discusses distressed properties, and how she goes about finding them in order to buy property well below market value. She shares the process of identifying distressed properties as well as the controversy surrounding this buying method.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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To hear more about these services, make sure to tune into this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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    In this episode of Property Showcase, Michael Beresford joins editor of Wealth James Mitchell to unpack why recent political changes are not reason for concern for Australian investors.<\/p>\r\n

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Many investors who would have been successfully approved for finance last year are struggling now to either begin or continue their property investment journey because of the current financial climate.

In this episode of the Smart Property Investment Show, broker John Manciamelli and Momentum Media director Alex Whitlock joins host Tim Neary to discuss how APRA changes and the royal commission have resulted in a tighter lending economy and what that means for Australian investors.

They discuss what traps investors should avoid if they are trying to obtain finance, the four key growth drivers in a property market and unpacking trust structures while revealing one type of trust that you should miss.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

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AREAS MENTIONED:

Hobart
Bondi
Deception Bay

 

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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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Getting finance approved in this tightening lending environment

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