Be the 27% of homeowners that refinance their mortgage properly for renovation
Almost three in four (73%) of homeowners think it would be challenging to refinance their home loan to renovate their home according to a survey of more than 1,000 homeowners commissioned by finder.com.au.
If you're looking to begin renovating a property, it's important that you read on to find out the basics of how to do it. Not only will we show you how to refinance to fuel your renovations, we'll also compare some of the lowest mortgage interest rates on the market to get you started.
Refinancing to renovate is the most popular reason for refinancing according the Mortgage and Finance Association of Australia (MFAA) and can be a great way to add value to your property. Typically there are really only two choices to make when you refinance to renovate. They are a line of credit loan or a construction loan.
A line of credit home loan, also known as an equity loan, allows borrowers to draw on the equity they have in their property. A common credit limit on these home loans is 80% of your Loan-to-Value Ratio (LVR). To calculate your maximum borrowing, subtract your current loan balance from your property value and then multiply this figure by 80%.
Line of credit loans can obviously only be used in situations where there is an available amount of equity to use. When a line of credit is approved, it is like a giant credit card attached to your home loan with an upper limit of your equity amount. It can be drawn on for any type of expense you like including investments, cars and of course, cosmetic renovations. Interest-only starts accumulating when equity is drawn down.
There is a huge amount of freedom with a line of credit home loan. This means they are suited to people who are disciplined financially as spending money on frivolous purchases could be tempting to some.
Line of credit home loan comparison
Construction loans are loans specifically suited to the purpose of building a property. Construction loans are particularly useful as the total borrowing amount is not based on the property's current value, but on a predicted value at completion. Borrowers therefore have access to vast sums.
To qualify for a construction loan, council-approved building plans and a fixed-price building contract must be in place.
Your lender will appoint an independent valuer who will assess your builder's work at each construction stage before the lender pays an installment. The beauty of this is that you have extra help on your side to force your builder to complete work at a high standard. In addition, interest-only accumulates on money drawn down — which is good for your back pocket.
Once construction is complete, borrowers can often refinance to the loan of their choice, or roll the loan over to the lenders' standard variable interest home loan.
Compare construction loans
Line of credit loans can only be used for cosmetic renovations, while construction loans can only be used for structural renovations. Therefore, you need to think carefully about the type of renovations you are making and whether the scope of the renovations will creep into structural changes from the initial plans.Back to top
A line of credit loan is generally suitable for renovations to change aesthetics. This includes renovations which only tidy up a property's appearance, rather than alter the structure, are considered cosmetic.
Cosmetic renovation examples include:
- Installing a new kitchen, bathroom & flooring
- Giving the interior or exterior walls a lick of paint.
Construction loans are generally suitable for structural renovations. Structural renovations are major endeavours that involve council-approved building plans and a licenced builder working in a fixed-price building contract arrangement. These are time-intensive projects that involve a level of expertise and certification above your average DIY renovator.
Structural renovations include:
- Altered or replaced foundations
- Removal of exterior or interior supporting walls
- New or replaced electrical wiring
- New or replaced major plumbing.
It is important to keep in mind when planning your renovations, what you are planning to do. Remember to do your due diligence and research all options available to you. For more information, leave a comment and we'll endeavour to help you.Back to top
While researching about how to finance a renovation job is a good idea, it's also smart to know how much a job can cost you. The table below shows the different national costs associated with renovating your property.
It shows the costs of three different renovation price points:
- Basic - A renovation using the cheapest designs and materials available
- Standard - A job where middle range designs and materials are used
- High - The most expensive materials, designs and labour costs are used for this type of project
|Renovation||Basic Cost||Standard Cost||High Cost|
|Room extension (ground level)||$38,475||$62,767||$83,865|
Source: finder.com.au, Australian Institute of Architects
- Work out how much equity you have by getting a valuation done and find out the maximum Loan To Value (LVR) required for your home loan
- Your LVR will help you determine how much money you have available to draw on
- Set a benchmark for value: research what the media house/unit price is in your area and look at properties recently sold in your area
- Rule of thumb: don't spend more than 10% of the median property value on renovations. Though this would depend on the conditions of the property
- Work out how much you're eligible to borrow, use this calculator
- And this calculator to help you figure out the cost of mortgage repayments