You need renovations, but you don’t have enough cash to finance them. What can you do? There are several ways to finance your renovation but look at each one carefully.
You don’t want to get in over your head and be strapped with debt. What are your options?
- Using Interest-Free Period Credit Cards
- Refinancing Your Mortgage
- What is an Offset Account?
- A Construction Loan
- Home Equity Loans
- What is a Line of Credit?
- A Redraw Facility
- What Type of Financing is Best for My Renovation?
Using interest-free period credit cards
Using an interest-free period credit card to finance your renovation is probably the best way to go if you are able to repay the amount during the interest-free period. This allows you to pay off the debt over the interest-free period at no additional cost to you. Spinryde Home Renovations offers this facility through HSBC for amounts up to $50,000 and periods up to 50 months interest-free.
Refinancing your mortgage
Another way to finance your renovation is to refinance your mortgage. Depending on the value of your home and its increased value, you may be able to finance a major renovation by refinancing your mortgage.
There are two ways to refinance. If you are paying your mortgage off comfortably, you can negotiate higher monthly payments and pay off your home more quickly. If you are struggling, you can extend your payments and pay the same or less per month.
It’s a good idea to anticipate this when you’re shopping for home loans. In some cases, you may have to pay a high “break fee” to refinance. In other cases, refinancing can be the least expensive way to do a large renovation because interest rates are lower and your payments are spread out over a long period of time.
There may be some disadvantages to refinancing:
- You may need to take out Lenders Mortgage Insurance for larger projects
- Fees may be involved
- Refinancing can extend your loan period
- You may not get a favourable rate if you have a bad credit rating
- In some cases, refinancing can damage your credit rating
- Weigh the advantages of refinancing against the disadvantages. In many cases, refinancing can be an ideal way to finance a renovation. In other cases, it can be a mistake.
What is an offset account?
An offset account is another way you can refinance your mortgage. An offset account is like a savings account, but the money you borrow is “offset” daily against your loan balance. This can save you money on interest rates.
Offset accounts are available to borrowers who have paid off a significant amount of their home loan. For example, if you had a $350,000 loan and you’ve paid off $50,000, that money may be available for you to borrow. An offset account can be ideal because you can dip into the account as you need the money. In some cases, you may need to pay off an offset loan in a fixed period of time. If that is the case, be sure you can pay off the loan within the fixed period.
With an offset account, you only pay interest on your home loan. For example, if you’ve paid $25,000 on a $350,000 loan, you only pay interest on the $325,000 you still owe. Offset accounts also have tax advantages.
If you need to refinance your home to get an offset account, the cost of refinancing may be prohibitive. Ideally, when you’re shopping for a home loan, ask if offset accounts are available. Your home loan rate may be slightly higher, so shop around and find the best home loan you can. Offset accounts are available for both variable and fixed-rate mortgages.
A construction loan
If you’re doing a major renovation, you may want to consider funding it with a renovation loan. One advantage of a construction loan is that you have an amount of money you can draw on to finance your renovation, but you don’t have to use all the money that is available. You also accrue interest as you use the funds. On a major project such as a home extension, this can save you money.
The disadvantage of a construction loan is that you may need to refinance your home to qualify. Fees can be expensive, so find out what fees you will need to pay before you commit to this type of loan.
Home equity loans
It’s no secret that property prices have been rising in Australia. This can work to your advantage if you need to finance a renovation. A home equity loan is based on the current price of your home versus the price you paid for it. To get a home equity loan, you will have to pay for a home valuer to determine the value of your home. Home valuers charge on average about $400, so it is not a major expense.
The disadvantage of a home equity loan is that you have to prove you are capable of paying it back. This can be negotiable in some cases. For example, you may be able to extend your home loan period and pay a lower monthly rate.
What is a line of credit?
You may be eligible to have a line of credit issued to you for your renovations. A line of credit is like a credit card but at a much lower interest rate. The disadvantage of a line of credit is that you need to exercise self-discipline. You can use a line of credit for any purchase, but you don’t want to get in over your head.
A credit line can be risky, but if you exercise self-discipline, it can be a good way to finance some renovations. One advantage of a line of credit is that if you can’t make payments, you can pay the interest only, but it won’t reduce your principle.
A redraw facility
If you have been paying more than your minimum monthly mortgage payments, you may qualify for a redraw facility. Your redraw amount is based on the extra payments you have made. Over time, this can amount to a large amount of money.
What type of financing is best for my renovation?
There is no single answer for everyone. As mentioned above, your other options will depend on:
- How long you’ve owned your home
- How much your home has increased in value
- The nature of your existing mortgage
- Your ability to pay off the financing for your renovation
Look at all the ways to refinance your renovation and choose the one that works best for you. You may want to extend your loan period to finance your renovation. Remember that fees may be involved and if you have to refinance, refinancing fees may be higher than you want to pay.
You can find a way to finance your renovation. Even better, renovations can increase the value of your home. Renovating can be the best way to increase your potential wealth, but you don’t want to pay more than you can afford. Be realistic about your renovations and find a way to finance your renovation that works for you.