renovate or build
Add Value to your property
As homeowners, we all want to add value to our property and the best way to do that is through renovation. Whilst the idea of renovating is simple enough, the reality is that improvements to the home cost money. The good news is that there are plenty of choices available if you need to take out a loan to complete your renovation.
Whether you take out a personal loan, add the renovation cost to your current home loan or take out a new home loan to cover the costs, there’s plenty of options to consider.
And remember, before you borrow any more money, make sure you plan your renovation. Which areas of the home do you want to improve? As always, preparation will help you maximise results.
As you begin your renovation adventure, we hope these tips will help you get the most out of the experience.
Renovations loans will be different for everyone - the amount you need to borrow, your existing loan balance, your property value and what the type of renovation you’re undertaking are the most important factors to consider. The most important first step you must take is getting a valuation done on your property. Loan Market can organise a free valuation for you by clicking here.
The three main options for renovation loans are:
- Getting a personal loan to cover renovations costs
- Adding the renovation total to your existing home loan
- Finding a new home loan
A personal loan can be a good option for small renovation projects, such as fitting a pool, where the cost is fixed in advance. You can pay off the balance earlier than you would by adding extra to your mortgage – typical personal loan terms are three to five years. And, with a personal loan, you’ll have fixed regular repayments enabling you to build in the cost to your budgeting. But on the downside a personal loan can attract a higher interest rate than a mortgage and the qualifying criteria can be stricter.
- This is an unsecured loan and will attract a higher interest rate
- The loan term will be shorter than your home loan term
- Personal loans have quicker approval processes and are easier to obtain
- Personal loan limits are around $30,000
If you have an existing home loan you can use the equity you’ve built to fund your renovation project. This is one of the most popular ways Australian’s fund their renovation projects but it’s important to know you can be limited in the amount you can borrow by the value your lender puts on your property.
The step is to have your current bank do a valuation on your property to determine it’s current value. Once the bank has calculated the properties current value it will tell you what your LoantoValue (LVR) ratio is and will have a rough estimate of how much they lend you for your renovation project. Most lenders won’t have much of an issue lending you enough money so that you’re LVR is at 80%. Any higher than that and you’ll have to prove the ‘purpose of funds’ and potentially pay Lenders Mortgage Insurance (LMI).
An example: Ben bought a property in 2010 for $700,000 and in 2015 his home loan balance was $600,000. He wanted to renovate his kitchen and his bank sent a valuer to his property who valued it at $850,000. Ben’s LVR was 70% and his bank said they would lend him $80,000 as that would increase his outstanding loan balance to $680,000 and that would be 80% of the current value of the property.
- Your loan balance will increase and so will your repayments
- You may be able to reset your loan term
- If you increase your LVR over 80% you will have to pay LMI
Another common strategy for home owners needing money to fund their renovations is to switch their home loan to an entirely new product and/or lender. There can be several benefits for both purpose of the renovation and the interest the borrower pays over the life of the loan.
One of the most common catalysts for switching your home loan is when a borrower's existing lender places a lower than expected value on the borrowers property, limiting how much the borrower can spend on their renovation.
The reason a valuation is so important is because lenders will use the current value of your property to determine your LVR which will impact how much equity you have and how much additional money you will be able to borrow.
Valuations can differ greatly different between lenders
When you want to use equity in your property for renovation, you may want your property valuation to be as high as possible. This is because it will lower your LVR and increase your potential budget for your renovations.
With valuations being so critical to renovation loans, it’s important to know that banks all use different valuers, and they may value your property differently. If you use the wrong valuer, you may not be able to borrow the money you need to consolidate your debts, renovate your property or make an investment.
A case study: Adam bought a house for $900,000 in 2012 and took out a loan for $800,000. By 2015 his loan balance was $750,000 and he wanted to access some of his equity to renovate his property. His current bank had a valuer asses that his house was worth $1M. Unsure if that was the right value of his house, Adam approached a mortgage broker who had another lender value his property at $1.2M. Adam ‘s current lender assessed his LVR to be 70% and said he could access up to $50,000 for his renovations, without having to pay LMI. The second lender assessed his LVR to be 58% and said he could access $210,000 for his renovations without having to pay LMI. In this situation Adam would be able to borrow an additional $170,000 for his renovations by selecting a lender whose valuer thought his property was worth more.
Depending on the scope and area of your property you’re looking to renovate, you may find some lenders more willing to accommodate your renovation loan. In all renovation cases, lenders are looking to see that you’re adding value to your property. Renovations that lenders generally believe add value include:
- Features that cut energy costs such as solar panels
- Kitchen upgrades
- Bathroom upgrades
- Replacing old or worn carpets and floorboards
- Upgrading window treatments
- Roof upgrades
- Storage additions
An example: Bob currently owns a property worth $600,000 and owes the bank $300,000. He wants to borrow $400,000 to demolish the current property and build a new one. Based on the current valuation the bank wouldn't be able help. However, if the valuer estimated the value of the new property to be more than $875,000 when finished, Bob has enough equity to proceed.