You have the home you want - but it's not perfect. It's in the right location, but the kitchen and bathroom are thirty years out of date. Or perhaps you don't have the cash to move, but you need an extra bedroom and bathroom. Home renovation is the answer!
But renovation costs money, and whether you're doing the work yourself or employing a builder, you'll need to finance it. If you have cash in the bank, well done - you can ignore the rest of this article! But if like most of us your savings don't quite cover a big renovation, you need to look for finance.
Using Your Existing Mortgage
You could possibly save up, if you don't mind waiting. But you could also extend your home loan, if you're below 80% loan to value. That's not a bad way to finance works, since you already have a relationship with the lender and their loan is already secured on the property. But there will probably be extra fees to pay, and of course if you can't meet the increased payments, your home is at risk. If you have a redraw facility on your mortgage, you might also be able to use that - and the costs will be much lower.
Special Government Deals
You may be lucky enough to qualify for state aid. For instance in NT, first home owners can get a grant of up to $10,000 if they buy a house that needs works. But the grant stipulates that they'll have to use a professional builder; it's not available for owner-renovators.
In Victoria, over-60s can apply for a loan on special terms to renovate. The conditions are quite specific, though, so not every older homeowner will qualify.
State aid is usually for small amounts, too. So while that might help re-equip an old bathroom or kitchen, it won't pay for an extension or a total refurb.
Get a Personal Loan
An unsecured personal loan could help with smaller renovations. Personal loans are relatively easy to arrange as long as your credit rating is good, and because they're unsecured, you don't run the risk of losing your house if you can't pay. (If you lose your job, you'd naturally prioritise paying your home loan.)
However, rates on personal loans are relatively high, so this might be an expensive way to finance your renovation. If you can pay the loan off quickly, that might not be a big issue - but watch out for early repayment penalties.
Equally, you could use your credit card to finance your renovation - but that's an incredibly expensive way to fund your works, with many cards charging 14-18% or even as much as 20%. A personal loan will almost always come in cheaper unless you have a very low cost credit card.
The Home Improvement Loan - a Better Solution
It may be more sensible to look for a specific renovation loan. Home improvement loans in Australia are readily available, for different amounts and with different conditions. Some banks offer construction loans for larger renovations. The bank will calculated how much it's willing to lend by looking at the increase in the market value of your home once the renovation has been finished. Often, these loans are made available in staggered amounts as the renovation progresses. But most of these loans are secured on your property and require a very good credit record - though rates are low, in line with home purchase loans.
Another possibility is to look for a home improvement loan such as one issued by Community First Credit Union, CFCU offers up to $50,000 over 1-5 years, at 6.39% interest. Because it's unsecured, it doesn't put your home at risk, and the rate is better than you'll get on a regular personal loan.
Another advantage of a home improvement loan is that since it's shorter in term than a home loan, you'll pay it off more quickly and your existing home loan doesn't get any bigger. (Of course, you do need to do your sums and make sure that you can manage the payments.)
Do some diligent searching before you make your choice between different home improvement loan options, as rates and conditions vary significantly between banks.
Be Ready to Show Your Plans
Most lenders - except for personal loans - will expect you to have drawn up basic plans and to have a robust idea of costs. Even if you're not using an architect or builder, arriving with plans and elevations you produced on your PC and with a list of the major materials costs will make you look professional and shows the lender that you've put some thought into the project.
And remember to have a good business case. If you want to spend $50,000, it helps if you can show that the house will be worth $50,000 more once you've finished. Equally, if you can show that all the houses for sale on your street had two bathrooms, and with only one, you're at a disadvantage, that's a good business case. "I want to paint my house pink because I like pink," on the other hand, is not going to take you very far.
While we've talked about these financing methods as alternatives, many renovators use a number of different sources of finance. For instance, some use a chunk of savings together with a loan; others use their credit cards for down payments on kitchen units or appliances, and finance the rest of the works with a loan. (That's one time a credit card might be worthwhile, since your purchase is insured - if it's not delivered, you can claim against the card. One important thing to remember, though, is that credit cards are only a short-term means of financing; you'll need to pay off the balance the month after, otherwise the annual rate is around a whopping 20%.) Feel free to pick and choose - but remember to work out your monthly payments and select a loan that won't cause you financial problems. If you're doing a big renovation, you really don't want to be worrying about money!