Renovations are costly, but homeowners looking to do some renovations have multiple ways to cover the expense. The key is to understand a single financial concept: equity.
As you repay your home loan, the amount of debt you have decreases and the portion of the property you actually own increases. This is your equity. Equity also grows if property prices rise.
You can tap into some of this wealth in several ways to fund a renovation. And there are other options too, like a personal loan or mortgage redraw.
Top up your home loan
In the simplest terms, a home loan top-up just means extending your home loan and borrowing a little more money. This is usually pretty simple to do if you’ve repaid a bit of your loan and built up equity.
Let’s say you have $300,000 left on your mortgage and your home is now worth $800,000. That means you have $500,000 in equity. You could apply for a home loan top-up with your lender, pull out an extra $30,000 and then bang, your reno costs are covered.
Applying for a home loan top-up is usually quick and easy. And the interest rate on your home loan is probably the lowest rate you can possibly get.
But you should know that borrowing your equity means repaying the money over a longer time, extending your mortgage. Or it means making larger repayments to make up the difference.
Plus, it’s not the only way to access your equity.
Use a line of credit loan
Think of a line of credit loan as a credit card attached to your home loan. Your lender approves you for a certain amount, called a credit limit. This amount is also based on your equity.
Once you’re approved, you can spend money to cover your renovation expenses and you don’t pay any interest until you actually start spending money on materials or tradies. This is a great advantage over a lot of other approaches to funding a renovation. With most loan types, you start paying interest as soon as the loan begins. A line of credit is far more flexible. These loans do have higher interest rates than your ordinary home loan, though.
You might have some money in your home loan
If you’ve been making extra repayments off your loan, you could pull some of this money out to pay for the renovation. This is called mortgage redraw and it’s something many (though not all) home loans allow you to do.
If your loan has an offset account and you’ve put money there, even better. This is just money in the bank and it’s yours to use as you need.
Putting extra money into your home loan helps you pay less interest over time and will get you out of debt faster. But having the option to use that cash for a renovation is a good one.
Get a personal loan
Personal loans are another finance option to pay for renovations. These loans have higher fees and interest rates than a mortgage but can be quick to apply for. If you have some equity in your home, a personal loan is probably not the best approach.
If you don’t have much equity but you’re confident you can cover the personal loan repayments, it is an option. It’s certainly cheaper than putting the reno costs on your credit card and getting whacked with an even higher interest rate.
Find the right finance option for your renovation
How you decide to pay for your renovation depends on your financial position, plus the size and nature of the renovation. If you haven’t got much equity and the project is small, a personal loan could work.
If it’s a complex renovation involving multiple payments at different times, a line of credit can help you avoid paying more interest than you need. If you’re paying it all in one go then a quick home loan top-up might work better.
Richard Whitten, Editor of Home Loans at Finder
Richard Whitten is an editor at Finder, and has been covering home loans and the property market in Australia for the last 4 years. He has written for Yahoo Finance, Money Magazine and Homely, as well as multiple banks and lenders.
Full Bio here: https://www.finder.com.au/author/richard-w