Understanding renovation loans

Renovations are a natural stage of property ownership and can be a fulfilling experience for both owner occupiers and investors alike. The challenge for many is finding the finance to complete the works without blowing their budget.

Renovation loans can alleviate the financial pressure and allow owners and investors to complete their renovation goals successfully. Understanding home renovation loans is the first step in deciding if it’s the right choice for your circumstances. There are several different options out there - here’s are a few to consider.

Using your Home Equity

An equity loan allows you to borrow against the increased value of your property and usually suits those who have owned their home for a longer period of time (because the value would have increased more significantly than for new owners). Equity loans often come with competitive interest rates and usually won’t incur a cost apart from valuation fees.

Personal Line of Credit

This type of loan is generally suitable for small projects and longer term renovations that are carried out over a few years. A personal line of credit allows you to access money as you need it (until you reach your approved credit limit). Using this approach, it’s easy to keep a record of how much you’re spending and the big benefit is that you only pay interest on the money you use.

Refinancing your existing home loan

Often suitable for major renovations, refinancing means you could be approved to borrow up to 80 per cent of your home’s value (minus your outstanding mortgage balance). Mortgage rates are usually much lower than credit card and personal loan rates, meaning if you refinance you will probably pay less interest. You can also look at paying mortgage insurance upfront to protect yourself against unexpected events.

By discussing your situation with a mortgage broker, you will be able to identify what option is best suited to your circumstances. Before starting renovations, it’s important to ensure your decision is affordable in the long term.