How to finance your renovations?

20 Oct

Renovating a property is a significant decision that will hopefully improve your standard of living or add substantial value to your property.

Financing a renovation wether it is cosmetic or structural isn’t as straightforward as you might expect. The type of renovations will dictate the type of loan required. If the wrong loan is chosen, you could be left with a pile of unpaid invoices from your builder.

1. Know your budget

Before considering financing your renovations, you need to have a clear idea of what type of work is required and your expected budget. You will need to organise some quotes with your trades or builder.

If you underestimate your budget or have the wrong type of building contract, you run the risk of getting knocked back from your lender.

Be conservative with your projection. If you think you need $100,000, we’d recommend to apply for $150,000 to cover unexpected costs. We’d also recommend signing a fixed price building contract with a standard HIA progress payment schedule for any structural renovations. Cost-plus building contracts are becoming very challenging to finance and lenders will restrict the amount you can borrow.

Please note that with the increasing cost of construction, a lot of builders are issuing post contract variations. Changes to a fixed price contract during construction are not welcomed by lenders and it is best to have some spare funds left aside for these unexpected invoices instead of seeking additional funding.

The next step is to speak to your broker to determine which loan will suit your needs and objectives.

2. Cashout loan

Also known as an equity loan, to be eligible, one must be looking to make upgrades to the cosmetic domain of their property.

Installing a new bathroom or kitchen, painting the interior or exterior of the house and other basic construction falls under this type of lending.

These renovations, more often than not, do not supersede the costs of structural changes, so homeowners can call on up to 80 per cent of their Loan-to-Value Ratio (LVR).

To calculate the value you can borrow, subtract your current loan balance from your property value and then multiply by 80 per cent. For example, if your property is worth $500,000, and you have $250,000 left on your loan, your home equity is $250,000. You then multiply this total by 80 per cent. If you’re uncertain of your home value, contact your Broker who can assist you to arrange for an appraisal or valuation.

With this type of lending, the funds will be released upfront and it will be up to the customers to manage the building project and pay the invoices.

3. Construction loan

Construction loans are suitable for structural work in your home, for example, if you’re adding a new room or making changes to the roof.

Construction loans give homeowners the opportunity to access larger sums of money, with the amount dependent upon the expected value of the property after renovations are completed.

The advantage of a construction loan is that the interest is calculated on the outstanding amount, not the maximum amount borrowed and you will only make interest-only repayments during the build. Once the construction is completed, the loan will revert to principal and interest repayments.

When applying for a construction loan, council approval and a fixed price-building contract with standard HIA progress payment schedule are required.

A standard progress payment schedule is :

Deposit - 5%
Slab stage - 20%
Frame stage - 25%
Lock up stage - 25%
Fixing stage - 20%
Completion stage - 5%

During the construction, the builder will issue an invoice as soon as a stage is completed. It is possible that a schedule may include additional stages but this will need to be approved by the lender and extra fees may apply for the lender to process these invoices.

Your lender will appoint a valuer to assess your construction at certain stages of the renovation. This usually happens a slab and completion stages.

4. Get professional help from a Broker

If you speak to a broker they will be able to determine which loan will give you the options you seek. This advice is essential, as a poorly planned construction loan could cost you more down the road.

Consumers should ask their broker, ‘What type of loan am I eligible for?’, because if you don’t get your construction loan right, you may be jeopardising your bank security.

While these specific options can be discussed with your broker, if they aren’t suitable, there may be other options available to you.