How to finance the perfect renovation
AUSTRALIANS love renovating, with a study revealing 56 per cent have completed works on their home or investment property since buying and another 20 per cent plan to do so in the next year.
But experts warn any added value can be lost by making the wrong finance choices.
Mortgage Choice's Evolving Australian Dream 2018 whitepaper revealed 62 per cent of renovations were to add value, while many chose to improve their home because it was too expensive to upgrade to a new one.
Mortgage Choice CEO Susan Mitchell said buyers were deterred by "the high barriers to entry in Australia's largest capitals", along with stress and other financial hurdles involved with moving.
Despite cost being a driver, 36 per cent of renovators had exceeded their budgets, reinforcing the need for thorough planning, especially when it comes to financing the project.
RateCity money editor Sally Tindall said there are several ways to finance a renovation, but paying down debt as soon as possible should be prioritised in each. The first was using your existing mortgage.
"If you are ahead on your repayments, most loans will let you redraw (or) you can ask your bank for a top up," she said. "Lenders are typically happy for customers to refinance their loan up to 80 per cent of the property's value."
A low interest rate was a plus, but downsides included funds being limited to available equity and high compounding interest if you let extra costs roll over for 20 or 30 years.
Construction loans were another option. Borrowers can draw down the money as work progresses, while only paying interest on the funds as they are used. However, extra paperwork is usually required, including building plans and council approval.
Those with good credit history could consider personal loans, provided they shopped around.
"Personal loans have higher rates than home loans, but shorter terms, so interest doesn't keep compounding for decades," Ms Tindall said.
Those tempted to use a credit card should be extremely careful and stick to small renovation jobs.
"If you're just looking for a small amount of cash … a credit card that offers a 0 per cent introductory period for new purchases could work," she said. "But only if you pay it off in full before any interest charges kick in."
Rachael Taylor and Jake Burn recently bought and renovated a four-bedroom house on the Gold Coast.
"I'm a carpenter and Rachael is a painter, so we thought we'd get something we could do up," Mr Burn said. "(Other buyers) that don't know what can be done are usually scared a bit by the idea of the costs."
After the costs of materials, the couple expects to make their money back in added value, with extra equity on top, but Mr Burn said non-qualified types were better off paying professionals.
"The guy who had the house before us was a DIY type. He'd probably watched a couple of episodes of The Block," he said. "He installed the doors and windows and had a crack at the bathroom tiles, which were pretty bad. It definitely helped us get a price reduction."
Mr Burn has worked on numerous renovation jobs and advised anyone considering a project to allow more time and money than they first estimated and to commit to one job at a time.
"We've been to friends' places where they start in one space, then try something different and a couple of weeks later, they've got an unliveable house," he said. "You need to pick a job and finish it before moving on."