A guide to getting started on Renovation and Refinance
Renovations are a great way to improve the livability and property value of your home, though they rarely come cheaply. If done correctly, refinancing can help you to draw extra funds for your renovation without incurring massive debts.
Before you look any further, the first step with any renovation is to know exactly what you want. Whether it’s to add luxury, to increase the overall size to accommodate a growing family, or simply alter the floor plan, knowing the renovations you want will help you to know which loan is best suited to you, and how much you’ll need to borrow.
With this figure in mind, you should take the time to recheck your financials and be sure that renovations are affordable to you right now.
Before you know what the appropriate loan for your project is, you’ll need to know whether the renovations that you’re making are structural or cosmetic. Structural renovations will involve altering or replacing the structural foundations, removing any supporting walls or replacing either the electrical wiring or plumbing of your home. Cosmetic renovations, on the other hand, usually involve painting interior or exterior walls or remodelling your bathroom, kitchen or flooring.
If your renovations are structural in nature then you should be looking at a construction loan. The benefit of a construction loan is that the total borrowing amount is measured against the predicted property value at completion rather than the current property value. This can make a huge difference, as banks are typically willing to lend up to 80% of your home value on loans. Another benefit of a construction loan is that interest will only start to accumulate after your loan drawdown date.
Upon completion of construction, you can then refinance your construction loan into a permanent mortgage or convert it to a standard variable interest loan.
For cosmetic renovations you can take out an equity line of credit provided that your equity is greater than 20%. If your equity is less than 80% you’ll need to pay Lenders Mortgage Insurance, as an additional expense, in order to protect your lender’s investment.
An equity line of credit allows you to take out an additional separate loan on your property, up to your bank’s lending limit, which is usually 80% of your property value.
The advantage of a line of credit is that it will be separate to your home loan and to your principal, meaning that you’ll only have to make interest payments on your line of credit. Your interest rate should be no greater than 4.5%, and if it is, you should tell your bank to do better or consider moving elsewhere.
If your home loan has a redraw facility you can borrow back any additional payments that you’ve previously made on your home loan, giving you access to further funding at a reduced interest rate.
Refinancing can be a great way to save for renovations, however there can also be risks associated with the process. These risks can include exit fees, a longer loan duration and hidden fees incurred by additional features.
It is important that you take the time to seek the help of a financial adviser in order to make sure that you structure your refinancing correctly and in order to get the most out of the process.
This article was brought to you by Brisbane based financial planning firm My Wealth Solutions.
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