Are you eager to renovate your home but struggling to find the funds? You’re not alone. Many homeowners use up most of their savings to buy a house and chip away at their mortgage, leaving little room for renovation costs. Fortunately, a renovation home loan can help.
What is a Renovation Home Loan?
A renovation home loan is exactly what it sounds like – using (or adding) to your home loan to fund a renovation. This can be a handy way to fund a renovation, especially if you don’t have the money available upfront.
Using Equity for Renovation Home Loans
Equity is the difference between your property’s value and the amount you still owe. As you pay off more of your home loan, the more equity you have. Similarly, the more your property value increases, the more equity you will have. You can use this equity to borrow more money to fund a renovation, also known as a “cash-out” refinance or “top-up” home loan.
How to Use Equity for a Renovation Home Loan
To use equity for a renovation home loan, you’ll need to have existing equity in your home. The lender will typically need to understand how much equity you have to access, plus your ability to afford the total lending amount (after you get the new loan). They will run a simple online valuation of your property or, in some cases, a full valuation to determine the current value of your property.
Pros and Cons of Using Equity
Pros:
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Start your renovations sooner
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Avoid paying money upfront
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Add value to your home
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Potential to increase equity
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Refinance to a better rate
Cons:
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Adding to your home loan
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Increased monthly repayments
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May not be able to service the new loan amount
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Lengthens the time to pay off your home loan
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Requires existing equity
Case Study: Meet Jodie
Jodie’s house is valued at $800,000, and she has $350,000 outstanding on her loan. That means she has $450,000 in equity in her property. She decides to use some of this equity to take out a renovation home loan. She works out the renovations will cost a total of $50,000, so she loans this amount from her lender.
Are there other options?
While using equity is a popular choice, it’s not the only way to fund your renovation. Here are two alternative options to consider:
Option 1: Use Your Savings
If you’ve built up a sizable savings account, you might consider using it to fund your renovation. This approach has its pros and cons:
Pros:
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Avoid lengthening your home loan
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Potential to pay less over the life of your loan
Cons:
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Significant dent in your savings
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Might need to forgo other financial goals, like a big holiday
Option 2: Take Out a Personal Loan
Another option is to take out a personal loan to fund your renovation. This might be suitable if you haven’t built up enough equity in your home or need to fund a smaller loan.
Pros:
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Solid option if you don’t have enough equity
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Doesn’t add to your home loan
Cons:
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Often come with higher interest rates
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Shorter loan terms, potentially leading to higher repayments in the short term
Note: it’s a good idea to chat with a mortgage broker about your home loan options *before* you take out a personal loan (it often makes sense to start with your lowest interest option, usually your home loan). Once you’ve crunched the numbers, you may actually decide to press pause and revisit your renovation plans in a year or so, depending on what your options are.
Should You Borrow Extra on Your Mortgage?
If you’ve built up enough equity and want to renovate ASAP, borrowing extra on your mortgage might be a good option. However, every situation is unique, and it’s essential to consider your individual circumstances. Consult with a home loan expert to determine the best course of action for your renovation plans.
Next Steps
Whatever you’re thinking, talking to a home loan expert (AKA mortgage broker) is the best first step. It’s easy and costs you nothing to chat with us or for us to find you the best options for your situation. Your dedicated home loan expert (broker) can clear things up and point you in the right direction, so all you have to do is enjoy your fancy renovation, sooner.