Renovating your home is often a good time to refinance. But you have plenty of other options too.
Refinancing to renovate means switching to a new mortgage and borrowing extra cash to cover a renovation. Switching to a more competitive mortgage is always a good idea and refinancing can be a smart way to fund your renovation.
This guide will break down the ins and outs of refinancing to renovate and also suggest some other alternatives.
How refinancing to renovate works
- Start by looking at your current home loan rate and comparing against other products on the market.
- Find a similar mortgage with a lower rate and features that suit your needs, such as an offset account. A loan with low fees will also be cheaper.
- Contact the new lender. Be sure to inform them upfront about the extra money you wish to borrow for the renovation. Use a borrowing power calculator to give you a better idea of what you can borrow.
- Gather your mortgage documents and apply for the new loan. Try to keep your spending down for the months leading up to the application if you can. This will increase your chances of success.
- Once approved, your new lender will help you leave your old lender. You will need to fill out a discharge form.
When should I refinance to fund my renovation?
If you're undertaking a fairly serious renovation then refinancing could help you unlock the necessary cash with a reasonable interest rate. And if you haven't looked at your home loan for a while you may be surprised how high your rate is now. Switching to a lower rate can save you a lot of money.
Renovators who want to refinance should consider these issues:
- Refinancing requires a new mortgage application and this can take a few weeks. If you need the funds fast you might have trouble.
- Refinancing can come with exit or switching fees from your old loan (especially if you're on a fixed rate) and fees for the new loan.
- If you don't have much equity or the value of your property has fallen then refinancing might be hard, or could even cost you lenders mortgage insurance if your LVR rises above 80%.
Others ways to finance a renovation
Depending on the size of your renovation there are other options that might suit you better. Home loan top ups, mortgage redraw or a line of credit can help for smaller renovations that are more cosmetic in nature, with a line of credit offering the most flexibility. For more serious renovations a construction loan is more appropriate.
Home loan top up
You keep your current mortgage but borrow a little extra. This is effective for borrowing smaller amounts but keep in mind that adding to your mortgage means it takes longer to repay and costs more in interest.
Redraw on your mortgage
If you've made extra repayments on your mortgage and your mortgage has a redraw facility you could pull that money back out to cover your renovations.
Just keep in mind that redrawing your extra repayments will mean paying more in interest. But if you make extra repayments in the future you can get ahead on your loan again. Learn more about mortgage redraw facilities.
Line of credit
Assuming you've been paying off your mortgage principal for a while you should have built up some equity. A line of credit loan allows you to borrow some of this equity and spend it as needed.
You could fund your renovation this way and you only pay interest on the equity you use.
If your renovations get very serious and require structural changes to walls, foundations or wiring you may need to take out a construction loan. That's why it's important to plan your renovations carefully and let your lender know what you intend to do so there is no confusion.
Structural renovations include:
- Altered or replaced foundations
- Removal of exterior or interior supporting walls
- New or replaced electrical wiring
- New or replaced major plumbing.
Tips for refinancing to renovate
- 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
Compare competitive refinance home loans
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