If you’re considering a renovation but you’re not sure the best way to finance the job, there are a few options to consider no matter how big or small the project.
1. Refinance your existing home loan
Refinancing is the process of replacing your current home loan with a new one. This could involve changing lenders or simply changing your current loan from a fixed rate to a variable.Renovations are often a great time to consider refinancing and allow you to apply for extra funds to cover the cost of renovation while also getting a better offer on your home loan. While there can be a cost to refinance, the benefits of doing so will generally outweigh any incurred fees as a lower interest rate may shorten the term of your loan and reduce your minimum repayments.Our lending consultants can review your loan and chat through your needs to suggest a better option from our range of competitive home loans.
If your equity is less than 20% of the property value, your lender may require you to take out Lenders Mortgage Insurance (LMI) when you switch. This protects the lender if you're unable to make repayments on your home loan, but is an additional fee that you may not have accounted for.
Quite often people don't realise every application for credit goes into their personal credit file. If you make constant refinancing applications, it could impact your credit score and make it difficult to receive lower interest rates for future applications.
2. Use your equity
Your homes equity is the difference between how much your home is worth (as valued by an appraiser) and the amount you owe on your mortgage. Equity is usually acquired through reducing the home loan balance or the value of your home having increased over time.Once you know how much equity you have you can apply for a line of credit which allows you to borrow against the equity in your home. Just like a credit card, you'll have a preapproved borrowing limit, plus you'll only pay interest on the amount you draw. Of course that's at affordable home loan, not credit card, interest rates.
Accessing equity is still a loan with interest charged for using the funds. At the moment, you may be able to afford your current repayments, however, if you increase your home loan your repayments will increase.
It is also important to be aware of what your finances will be like in a few years. If interest rates are low when accessing equity, will you still be able to comfortably afford repayments once interest rates rise?
If you've been paying more than the minimum required mortgage repayments then it's likely you're ahead in your home loan and have built up a surplus of funds. If your home loan allows it, you could redraw this money to fund the renovation, however it's important to note not all loans have a redraw option and there may be fees associated with taking this money back out.
The redraw facility is typically only available on a variable or flexible fixed rate home loan.
Any funds redrawn are added back to the home loan and must be repaid, which then increases the time it would otherwise takes for a borrower to repay their home loan.
Some lenders may place a limit on the number of redraws you can make within a certain period, and may have a minimum and maximum amount that can be redrawn at any one time.
4. Apply for a personal loan
A personal loan is great for smaller and mid-size renovation projects, especially if you don't have enough equity, or are unable to redraw as part of your home loan.Once you know how much money you need to borrow, a personal loan can be processed quickly with funds deposited directly into your account.Auswide Bank offers personal and home renovation loans from $3,000 up to $50,000.
Often personal loans offer a lower interest rate than credit cards and allow you to make additional repayments without incurring a fee.
Interest rates on personal loans are higher than home loans because they're unsecured credit i.e. a loan that doesn't require any type of collateral as security against bankruptcy or failure to meet payment. Personal loans have a maximum loan term of seven years, so while the interest rate is higher, the interest charged over the term of the loan will be lower.
The maximum you can borrow will depend on whether you need a secured or unsecured loan.
5. Credit card
If your renovation plans are on the smaller side and include some DIY, then a credit card is an easy way to finance small purchases. Paying the balance of the credit card each month could save you on interest repayments, especially if you opt for a low rate credit card.
Some credit cards allow you to earn rewards such as cashback on eligible purchases, rewards points or frequent points. Rewards credit cards usually have a higher interest rate and annual fees than non-rewards cards so be sure to do your research beforehand on which option better suits your needs.
Published: Thursday, 03 Feb 2022