You’ve been dreaming of that new kitchen and dining room for as long as you can remember, and now the time has come to put your plans in motion. But do you really have the budget to afford the works? Here are a few things to think about before making the leap from Pinterest board to blueprints.
Work out your budget
Before you look at borrowing any money, you first need to work out how much your renovation will cost. Get Ask An Architect to send you their comprehensive guide to costing a renovation.
Before your finalise your plans, you can arrange for a building inspector to help identify any structural work that might be needed. Major work could significantly increase your budget, so it may be worthwhile to talk directly to a professional to get a more accurate understanding of how much your plans will cost. Architects and master builders are usually happy to provide a cost estimate or quote, so think about getting more than one to give you an idea of the range.
In addition, add a percentage for contingencies: I recommend that you add another 10% to 15% to the overall budget to cover delays, cost overruns and complications that arise throughout the renovation process. These contingencies need to be built into your financing plans from the outset.
Once you know what the costs will be, you can look into the best way of raising the necessary finance. In an ideal world you will have saved at least part of the amount beforehand, but renovations can run into the tens or even hundreds of thousands, so most people will need to borrow all or part of the funds required.
Unlock your equity
If you’ve been in your home for a while, chances are that you have considerable equity, both as a result of paying off your initial home loan and from rising property values.
For the uninitiated, equity is the amount of your home that you own; that is, the value of your property, less the outstanding loan amount. For example, if your property is valued at $500,000 and you owe $300,000 on your loan, your equity is $200,000 ($500,000 – $300,000 = $200,000).
As long as you can meet the increased loan repayments and the renovations are likely to add value to your property, most lenders should be willing to lend you a percentage of your equity for home renovations. Depending on your situation, this equity can be accessed through loan redraw, increasing your existing loan, or by refinancing your loan entirely.
Most home loan providers will offer a product called a building or construction loan, which is a particular type of loan where the funds are provided progressively at various project milestones. The main advantage of this type of loan is that you can borrow against the final value of your home, i.e as if the project has been completed. This type of loan is generally mandatory where you are making substantial structural changes to the property which your lender has taken as security for the loan. The documentation requirements are more comprehensive since lenders will generally ask to review the building plans, cost estimates or quotes and the approved Development Application.
These loans are usually set for interest only repayments during the construction period. This minimises your cash flow during a period when you may otherwise be incurring higher than usual costs in other areas. Once the construction is finished, the loan usually reverts to a normal home loan with P&I repayments and you have the opportunity to consolidate accounts to your preferred structure.
If you want help in assessing how best to approach your renovation project get in touch with my office and we will provide you with more information and advice specific to your own situation.