Refinancing to renovate a property is a significant decision that will hopefully improve your standard of living and add substantial value to your property.
Refinancing isn’t as straightforward as you might expect. The type of renovation proposed goes a long way to dictating the loan required. If the wrong loan is chosen, you could be left with a pile of unexpected debt.
Know your budget:
Before considering refinancing, you need to have a clear idea of your budget.
If you underestimate your budget, you run the risk of getting knocked back from your lender.
Be conservative with your projection. If you think you need $100,000, I’d recommend to apply for $150,000 just in case, if you can afford it. The key is stick to your budget.
No structural renovations:
Installing a new bathroom or kitchen, painting the interior or exterior of the house and other basic construction which are not structural can often be quite easy to apply for as a ‘cash out’ loan if you have the equity available (up to 80% LVR). This means you can have full control of the the funds.
Construction loans:
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. This means you have more money available in your kitty, but only pay interest on the money you choose to spend.
For this reason, a broker may recommend that you apply for just one loan, but leave some leeway in your borrowed kitty.
When applying for a construction loan, council approval and a fixed price-building contract are required, which a broker can assist with to reduce the paperwork and stress.
Broker advice:
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.
