How renovating adds value to your home


Renovations can change the face of your home and add serious value. However, there are big decisions to be made and budgets to be set.

It is every homeowner’s dream to buy their own home and keep it looking good. The big worry is always the cost – home renovations can be expensive, and the cost of borrowing money can be very high. That’s why it pays to explore refinancing as an option for getting the money to renovate your home.

There are really two options for you if you want to do a home reno and don’t have the savings already – you could dip into your home’s equity by refinancing and opening a line of credit, or you could apply for a construction loan.

Home equity and renovations

Your home tends to be your biggest asset. Now, you might be lucky and have other assets, but generally your home is the big one and, provided you’ve been paying off your mortgage you could leverage it to get your home renovation done. Given that a standard kitchen renovation could cost as much $40,000 (ouch), home renovations don’t come cheap.

Refinancing your home loan gives you the chance to use your home’s equity to access the money you need for your home renovation. The way this works is you’re given a line of credit based on the value of your home and on the amount of your mortgage you’ve repaid. This is calculated using a ratio called the loan-to-value ratio (LVR) – the ratio of your home loan to the market value of your home.

As a general rule of thumb, lenders tend to be willing to lend you up to 80% of your home’s LVR. You’ll probably need to get a valuation done on your home since the value of your home is not fixed and has probably changed since you first got your mortgage. Your broker can help organise a valuation for you.

One thing to keep in mind is that different lenders operate in different ways and valuations are no exception; some lenders might estimate the value of your home based on what it would be after the renovation is done, which could turn out in your favour. It pays to get a mortgage broker on your side so you have help figuring out the the pros and cons associated refinancing to tap into your home equity.

Construction loans for home renovations

Construction loans tend to be used to build new homes, but if your renovation involves structural renovations like construction, changes in foundations or supporting walls, or replacements of wiring or plumbing structures then you could try for a construction loans. Construction loans can be helpful if you’ve not built up much equity in your home.

Like with anything there some hoops to jump through; you’ll need to have council-approved building plans and regular valuations done throughout the process among other things. Generally, your lender is also involved as you renovate, monitoring the progress of each stage before they release more money. Plus, since the money is released in installments and not in one big payment, the amount of interest you pay is limited to the amount of money that has been released for construction.

Choosing the right loan for renovating your home

If you’re not down with accessing your equity or getting a construction loan you could look at a personal loan or using your credit card for home renovations, but given the typically higher interest rates on these this could turn out to be a seriously expensive option.

As a general rule of thumb, you could consider accessing your equity for a line of credit if your renovations are cosmetic. Cosmetic renovations are the type that make your home look good - a facelift really. This could be installing a new kitchen or bathroom, changing the flooring, or adding an new paint to the inside or outside of your home.

Construction loans could fit the bill for renovations that alter the structure of your home and for those that require council approvals. These type of renos tend to involve more time and money, plus they tend to need a lot more labour.

Which renovations add the most value to your home?

One of the most popular renovations that adds value to your home is a kitchen renovation. Modular kitchens are up there as one of the favourite options for giving homes facelift since they tend to be cost-effective and don’t need extensive labour to install.

Bathroom renovations are also good ones to consider especially with extra bathrooms tending to add value to a house’s sale price. A modern bathroom could change the face of your home and set your home up nicely for future buyers or tenants.

Painting your house’s interior and exterior is another popular way of boosting your home’s value. Updating your house colour from an 80’s salmon pink to a modern colour can go a long way toward how your home looks to prospective tenants and buyers.

Whatever your choice of renovation, you’re going to want to start off by thinking about a plan for what will add value to your home. A well planned budget and the right choice of financing could be what sees your renovation succeed.

Our easy-to-follow refinancing guide can walk you through the process of refinancing your home loan and determining if it sounds right for you, helping you to make your dream renovation a reality.