Whether it was an initial vision at the time of purchase, you've got a growing family or you've been inspired by a reality-TV show, there are many reasons why an extension or kitchen remodel might be on the agenda.
When you're ready to move on from just dreaming, one of the first big questions to tackle is: how are you going to finance your home renovation?
Unless you’ve bought your home off the plan, home renovations of some description could be on your radar.
And while you might think you’re ready to get cracking, Carolyn Bray, Head of Credit at Macquarie’s Banking and Financial Services Group, says it’s wise to look before you leap.
“The first thing you need to do is be clear on your motivations for renovation. Go back, and sense check it really objectively. What is it that you want to achieve?
“Do you want more space? Do you want to change the look or feel of something? Be clear about why you’re doing it.
“Make sure you’ve assessed the potential cost. If you’re going to be using some of your equity, will it mean a big additional payment each month? Take that step back, make sure you’re comfortable with the additional debt you’re taking on and your capacity to repay that debt, without putting undue stress on your day-to-day financial obligations. Also make sure you're not over-capitalising on your renovations – spending more on them than you’ll get back in additional value.”
Before you dive into renovations, Bray recommends looking at the local property market. “You might be thinking of renovating to put another floor on, for example, but there might be a property for sale in your neighbourhood that meets your criteria. Just consider the cost (both in time and money) of buying a new home, against the cost of renovating.”
Financing your home renovation
If your reno plans survive your sense check, then the next question is how to fund it.
“Of course, one option is that you have enough money saved to do the renovation,” says Bray. “However, that’s a luxury not many people have. So there are a couple of other options to help you turn your property into your dream home.”
Using your home loan equity to fund your renovation
Equity is the difference between the current value of your home and the amount owing on your home loan. Your lender can complete a valuation of your property and if it has gone up in value, you may have more equity than the sum of what you've paid back on the loan. The equity you've built up can be used to finance the renovations.
However, the amount of equity you have is not necessarily the exact amount you will be able to access, since you will still need to afford the increased cost of servicing a larger loan and banks will typically only lend a proportion of the property’s value.
“This is a common way people pay for their renovation – refinancing to leverage the equity they already have in their home,” says Bray.
“For instance, say you bought your home a few years ago for $400,000 and have $200,000 left on your home loan. If in that time, the property’s value has increased to $700,000, you’d have an equity balance of about $360,000 (allowing for an 80% loan-to-value ratio).
“In that scenario, you could leverage some of that equity to pay for your renovations, either by refinancing your loan, or by using a redraw facility if your account has that option.”
Remember, be clear about what you’re doing and why you’re doing it, and make sure whatever renovations you undertake add value to your home and you have the capacity to repay the additional debt you’re taking on.
- Make sure you have clarity around why you’re renovating.
- Weigh up the cost of moving home versus the cost of making changes to your home.
- Consider whether you have enough savings to finance your renovation.
- If you don’t have enough in savings, you may be able to release some of the equity in your home, by either refinancing or using a redraw facility.
Speak to one of our home loan specialists to see if you can use the equity in your home loan to finance your renos.