Financing your home renovation: How to find the cash you need

Any renovation, big or small, is no simple endeavour. Even the most simple remodelling can set you back a few thousand dollars.

Unfortunately, we don’t all have a few thousand dollars lying around. 

Coming up with that kind of money can be an uphill task. Thankfully, there are a few ways around this problem.

But first, here are a few things you need to know before you set off on your home renovation.

What You Need to Know Before a Home Renovation

Do You Need Local Council Approval?

Council approval is the first thing you need to check off on your renovation to-do list.

Getting council approval will ensure that all your plans are in line with local regulations. You don’t want to have to change your ideas in the middle of a renovation because they don’t meet local regulations. That’s a waste of money you don’t have.

Unsanctioned renovations can also lead to problems during the sale of the home.

And getting council approval also costs money so you need to factor that into your budget from the start.

Get the Estimated Cost of The Renovation

With money being tight, you must put every single cent to good use. You can do this only through thorough preparation.

By failing to prepare, you are preparing to fail. — Benjamin Franklin

Before you start knocking down walls and tearing up floors, it would suit you to first work out the estimated cost of the entire renovation.

Image from flickr by Brock Builders

Get several quotes from tradespeople experienced in home renovation, and work out an approximation of the total cost of the project.

Knowing how much the renovation will cost helps you prepare and make more informed decisions. The quotation also determines how extensive the renovations will be.

You’ll be able to set a budget for the renovation and even set aside some extra funds for the (inevitable) unexpected.

How to Raise Money for the Renovation

With the quotations sorted and the budget set, you’re ready to begin the renovations. But first, you need to raise the money to get the work done.

There are several options to consider, depending on how extensive your renovation is. Here are a few. Weigh them up and find one that best suits your needs.

Home Equity Loan

Home equity loans are one of the most popular methods through which people raise money for home renovations and with good reason.

Home equity loans allow you to borrow against your home’s equity.

Equity refers to the difference between the value of your house before any value-adding renovation and the amount you owe on your mortgage.

The rise in property prices across Australia has spelt good news for those looking to renovate their houses using home equity loans (although some regions have experienced a slight correction in recent months).

A rise in property prices means more equity, which in turn means an increase in how much you can borrow.

You can use an equity loan calculator to determine how much equity you have.

Note that with this kind of loan, you won’t be able to borrow the full value of your home without mortgage insurance. Lenders will usually offer 75-90 per cent of your equity.

Building and Construction Loan

A construction loan is an excellent option for extensive renovations. Construction loans provide progressive payments to the builders throughout the construction process.

Construction loans allow you to borrow against the post-renovation value of your home. They also give you the option to pay only the interest part of your loan until after the construction is complete.

The incremental payments over the construction period offer better cash flow. It also saves you from paying interest on your building cost until after completion of the work.

Note that the more you spend on your loan, the more interest you will pay.

Getting approved for a construction loan is also a bit more complicated than a standard home loan. You will need your building and construction team to draw plans to provide to the lender for review.

Increase your chances of approval by getting the most accurate quotes from highly experienced tradies.

Get a Line of Credit Loan

A line of credit loan is like a credit card but with much lower interest rates. It uses the equity in your home to extend you a credit limit that you can use for your renovation.

It offers great flexibility because you can use only as much as you need, and you incur interest only on that amount.

Exercise self-discipline with a line of credit loan to avoid going over your credit limit. With no regular repayment schedule, it falls on you to ensure you service the loan and the balance does not exceed the limit.

Ask a home loan specialist and your accountant to work out if this is the right loan for your home renovation.

Refinance an Existing Loan

Refinancing is yet another way to tap into your home’s equity. Here, you take out a new loan or extend your current mortgage by drawing from the equity you’ve built up.

Your lender will revalue your home during the refinance process and may offer you a better deal through a lower rate or better loan features.

Refinancing an existing loan could be an easy way to raise funds for a home renovation. But with a refinance, you will also be adding to your original debt.

Most of the big lenders provide advice about refinancing and whether it is the best option for you.

Take Out a Personal Loan

If you don’t have enough equity in your home, or perhaps you don’t have a redraw facility, then a personal renovation loan might be the way to go.

A personal loan is either secured by an asset such as a car which the lender may take possession of in the event of default, or unsecured – tied to no assets at all.

Personal loans are a fast and convenient way to finance a renovation because they are usually quick to process.

However, there’s a limit to the scale of renovation you can undertake with a personal loan.

Usually, personal loans peak at around $30,000, making them ideal for minor renovations.

Note that secured loans have lower interest rates than unsecured loans. The rates also vary among lenders – a bit of research before taking out a personal loan could save you money!

How to Get The Best Bang For Your Buck in a Home Renovation

Raising the capital for a home renovation is not easy. So you must do all you can to make sure not a single cent goes to waste. To do this, you’ll need to:

Learn About Your Loan Interest Rates

Interest rates are, in essence, the cost of money. Lower rates make borrowing money cheaper for consumers and offer a reduction in the amount paid on savings. Higher interest rates mean the exact opposite for consumers.

Most lending institutions will adjust their interest rates based on the Reserve Bank of Australia to be more competitive.

Learn all you can about loan interest rates to help you choose the most suitable loan for your home renovation.

Learn the Best Scale of Renovation for Your Home

Home renovations add value to your home. The upgrades need to be strategic and compatible with the house. For instance, installing a high-end kitchen in an average house might cost more than the actual value added to the home.

A good rule of thumb for a home renovation is that it should not cost more than 5-10 per cent of the value of the home.

Do some research and find out how much value your renovation will add to your home. You can do this by consulting a real estate agent and comparing the prices of similar homes.

Then, get quotations from builders to get a sense of how much the renovations will cost.

Renovations offer an opportunity to not only make your home better but also substantially increase the value of your home. But you can only achieve this by partnering with the right people for the job.

It’s surprisingly quick and easy to get a few quotes from home renovation experts, but take the time to choose the one that understands what you want to achieve, and you are well on your way to making your home renovation dreams a reality!