What is the best way to finance a renovation?
Have you been thinking about renovating your home, but the financial details are still a bit hazy? Renovations can be perfect for keeping up with lifestyle changes, adding value and transforming your living spaces. So how do you create your dream home without draining your hard-earned savings? Knowing the financing options available can help you determine what’s best for your situation, keeps the process smooth and lets you focus on the good stuff.
Refinance your home loan
Refinancing your home loan essentially means you replace your existing mortgage with a new one. This frees up some of the equity you have in the property and you can use this to bring your renovation dreams to life. You may decide to refinance with your existing lender or you might find a different one – just make sure to take interest rates, loan terms, fees, T&Cs etc. into consideration when deciding to refinance your mortgage.
Many lenders will require a mortgage to have been running for a minimum of six months before allowing you to refinance, so this option might not be available to all homeowners but could be an option down the track.
Borrow from a family member or friend
If your friends or family can afford it, an informal renovation loan can sound tempting. It often means no interest rates and loose terms where you just pay back the funds in good faith. Of course, getting money involved in your personal life can sound better on paper than it is in reality.
That’s why it’s always recommended to put loan terms down on paper. It may feel a bit awkward, but it can save everyone a lot of trouble if things go south. Clear-cut terms can help draw a line – with your personal relationship on the safe side of things.
If you’re not comfortable borrowing money from your loved ones, but they’re keen to help, they may be able to act as a guarantor for a personal loan – which may actually lower your interest rate.
Credit card
A credit card offers accessible cash when you need it. Used wisely, it can help you achieve your renovation goals by smoothing out financial wrinkles, such as paying contractors on time, making minor improvements, covering sudden and unforeseen costs, and generally having a reliable backup option.
Of course, credit cards come with their caveats, like higher interest rates and the obligation to pay on time at the end of each month – or risk fees and potentially higher interest rates. It will also fall on you to budget accordingly and make sure that varying repayment amounts each month don’t complicate your overall finances. You may also find that your credit card limit isn’t sufficient for your home renovation plans, but this credit limit will vary from person to person.
All in all, a credit card can be very helpful for minor expenses that you can pay back quickly and can help free up some cash flow.
Building and construction loan
For major renovation projects, it may be worthwhile to consider a construction loan, also known as a building loan. It’s a deal between you, a lender and your building company that lets you fund your construction project in stages.
As your builder completes a project stage, they create an invoice for your lender, and the lender pays the builder on your behalf. With a building loan, you’ll work closely with your lender to determine a loan amount, pre-arrange payments, and make sure everything is going to plan.
During building, you’ll generally make interest-only repayments. As each stage is completed, funding is released for the next stage.
A building loan can cover all the renovation costs you need, but it’s the same type of loan you get when building a new house, which means there’s a lot of red tape. You’ll need to work with a registered builder and have all the building permits, council approvals, plans, insurance and documents ready for your lender.
Personal renovation loan
Whether you want to redo the floors, give your home a fresh coat of paint, add a backyard living space or spruce up your landscaping, a personal renovation loan can give you the flexibility and freedom to make these projects come to life.
A personal loan works a little differently from the other financing options – you’ll generally receive your loan amount directly into your personal bank account land you’re free to spend the funds on whatever home renovation costs you like.
You should seek a lender whose repayment schedule fits your budget – whether that’s weekly, fortnightly, or monthly and many lenders will even let you customise the repayment date.
It’s also important to check out the fees before signing any loan contracts. If you’re thinking about paying off your loan early, make sure to select a lender who won’t reward your hard work with additional fees.
A personal renovation loan in Australia typically allows you to borrow up to around $50,000 so it’s best suited to smaller renovation projects and aesthetic changes rather than add-ons or structural changes.
Still not sure what the best way to finance your renovation is? Shortlist potential lenders and complete a free rate estimate to find the best finance option for you and your big ideas.