As with any financial product, you really need to know what you’re looking for. With mortgage interest rates at record lows, a home loan top-up can seem like a good idea.
Take a closer look - and you’ll see that low interest is just the start.
Renovation loans are usually less costly than credit cards and home loan top ups, simply by virtue of the amount of time they take to pay off. The longer your loan term length, the more interest you’ll pay over time.
This of course assumes that you are in the earlier stages of paying off your mortgage, with ten or more years of repayments ahead of you.
If you do have a long time left on your home loan, be sure to compare the total cost of the additional amount you plan to borrow over the full time you’ll be paying it back. While the change to your monthly repayments can be temptingly low, a long loan term may well mean your new kitchen costs a lot more than you thought it would overall.
Keeping your renovation loan separate to your home loan can really save you in the longer term. And if you do your research, you can find a loan that offers no early repayment penalties and minimal fees. When that’s the case, you can save from the start, and pay your loan back over a time period that really suits you.
Worth looking into?
There are key questions you need to answer to make an informed decision.
How much do you need?
While it’s tempting to ask for more than you really need, it’s better to limit yourself to what you really need for the renovation you have planned. A lower amount means lower risk, and this could impact your interest rate, as well as the likelihood of a hassle free approval process.
How much can you afford?
Look at your everyday budget to see how much you can afford to put towards the new loan repayments each month. Be sure to give yourself a buffer, because life happens (and missing your payments can cost you a lot). And if you think your expenses might change in the next few years (say, if you want to buy a house or a baby might be on the cards), remember to factor those in too. Future you will thank you.
How long will you need to repay?
Simply divide the loan amount by your monthly repayment to get a ballpark amount of the time it will take to repay the loan. You might be surprised at how short it will take you, compared to the time you have left on your home loan.
Decide between secured or unsecured?
If you’re willing to put an asset like your property up as security against the loan, you can consider a secured loan. This will get you a better rate, however, the lender has the right to repossess the asset if you can’t repay the debt. So just make sure you’re confident in your ability to repay the loan. The purpose of your loan will also need to be eligible.
Now that you roughly know what you’re after in terms of finance for your renovation, you can start looking around at different options and look at loans that tick your boxes – comparing apples with apples, oranges with oranges.
Less judgement, more flexibility
Did you know with a renovation loan, you won’t have to submit renovation plans as part of the application process? So what you choose to do to improve your home is entirely up to you. From landscaping to loft extensions, it’s your big idea - no judgement or valuations apply.
This is usually not the case for an extension to your mortgage. The loan provider will need to see a lot more detail in terms of your planned improvements, and there may be guidelines as to the kind of home improvements they are willing to fund.
Of course, all of this extra oversight means a lot more time and hassle in terms of the application process itself. With a renovation loan you could be making a start on your project at the same time as a mortgage provider would be making a start on your application review. And for most of us, our time is valuable.
Shop around. Shop around.
More lending services means more loans on offer means more competition means competitive rates. Though do your research and always check ratings, reviews, fees, charges and penalties.
It may help to reach out to those you already bank with, that way they’ll have your transaction history at hand and the approval process will be swift and theoretically the interest will be lower. But, again, check fees and charges. Having a low interest loan is great, but not if there’s a ton of fees and penalties that counter that low interest.
That’s the long and the short of it and everything you need to know to help decide if a renovation loan is for you.