Pay Your Way

Financing renovations.

Home renovation is a $33-billion-ayear industry in Australia and set to get even bigger, given that the number of houses in the key renovation bracket of 30 to 35 years old will rise substantially in the next few years. But where does all the money come from? How do you find the readies to pay for that upgrade to your daily lifestyle?

The best option, but perhaps the least realistic for most people, is to save up the cash. Next best is to extend your existing home loan. The worst is to use a credit card or personal loan; interest rates on both of these are much higher, so they should only be considered for small works or if you’re in a position to pay them off quickly.

Also worth considering is a line of credit from your bank or another lender. In this case, you pay interest only on the money you use and, as you pay off the balance, you can re-borrow up to a set limit without reapplying.

There are two approaches to using an existing mortgage to finance a reno. If you’ve been making extra payments along the way, you may be able to redraw those funds. But of course, that may not be enough, and not all home loans have a redraw facility.

The other option is applying to increase your existing loan. A danger here is that this step may take your loan above 80 per cent of the home’s valuation and incur costly lender’s mortgage insurance (which only protects the bank, not you).

If you can borrow the money based on existing home equity, a simple way to refinance is to increase your loan and place the renovation money in a 100-per-cent offset account. This way, you’re effectively not paying interest on that money until you use it, advises loan-comparison website Canstar.

You may, of course, look for a new lender and refinance an existing loan for a larger amount if you can find a better deal – that is, a lower interest rate and/or better features. But refinancing can incur additional costs, such as upfront valuation and application fees, plus exit fees or other bank charges.

Before you do anything, decide on a sensible figure for the renovation budget. “It’s important not to overcapitalise,” says Chad Egan of Sydney’s Cobden & Hayson property group. “Unless you’re looking to stay in the property long term, cosmetic renovations should generally come to about 10 per cent of the property’s value.

“Keep a common theme throughout and think carefully about what will appeal to the widest range of buyers,” he adds. “Don’t get too attached to making the renovation personal. Areas that generally add the most significant value are kitchens, bathrooms, carpet or floorboards, painting, light fixtures and blinds/curtains.

“In more expensive suburbs, however, there’s generally a demand for higherend renovations. Providing that the style and theme suit the marketplace, increasing your budget could prove to be a worthwhile exercise.”