Financing your renovation project
Of course, having the plan (drawn by an architect) is one thing – getting the finance together is another.
It’s wise to have a realistic idea of how much you want to spend to start with and, a rule of thumb, says Karkal, is to spend around 2% of the property value on any one room. “If you've got a million dollar house and you want to do your kitchen, look at spending $20,000. If it's a $2m house, use $40,000 as your guide.”
When assessing how much you will need to finance your renovation, it’s important to err on the side of caution.
“Things will always pop up when you’re renovating, so you need to have a 20% buffer. In older houses, some wiring might need replacing; you might find asbestos in the roof or behind the wall, there might be an unstable brick wall, which you thought was fine.”
There are a number of finance options available for renovators, depending on the size and scope of your renovation.
If you already have a home loan with an offset or redraw facility with funds available, consider using that to fund the cost of your renovation. Your home loan interest rate should be much lower than obtaining finance through a credit card or personal loan.
Depending on whether you're making structural or cosmetic changes to your home, you might like to consider:
A construction loan works by allowing you to borrow against the value of the property. In this case, the lender will take into account the estimated value of the property after renovation. A renovation only qualifies for a construction loan where there are structural changes made.
If a valuer determines that your renovations will add $100,000 in value to your $800,000 home, the lender calculates your equity at $900,000 minus your current mortgage. The loan amount is generally released as renovations progress to ensure the funds aren't used for other reasons.
An offset account is an account that operates in conjunction with your home loan. The balance of funds in your offset account is deducted from your outstanding home loan balance, reducing the interest you pay on your loan.
For example, if you have $50,000 in your offset account and a $500,000 mortgage, interest is only charged on $450,000. If you then withdraw $10,000 to fund your home renovations, you'll be charged interest on $460,000.
Home owners may want to use an offset account to save for the renovation. That way, in the process of saving, you’re lowering the interest you have to pay on your mortgage.
With a Macquarie offset home loan package you can access the funds in your offset account at any time through ATMs, your debit card, online or phone banking. So when you have enough saved to start renovating, you can pay for the project straight out of your offset, without the hassle of having to apply for finance.
Using an offset account as part of a holistic financial management program can have many benefits. Explore how you can manage your money with Macquarie’s smarter home loan.
Mortgage redraw facility
A mortgage redraw facility allows you to access any extra payments you've made over and above your minimum monthly repayments.
By redrawing money already paid into your home loan, you can finance your renovation on the same terms as your home loan.
Remember, if you are taking out a new loan or refinancing to unlock home equity to fund the renovation, you will have to go through an enhanced credit assessment.
Speak with your bank or mortgage broker and they will be able to guide you through the process, helping you turn your renovation dreams into reality.