Refinancing your assets to #renovate a property is a significant decision that will hopefully improve your standard of living or add substantial value to your property. It can also be a great way to generate some #equity in your property.
Refinancing isn’t as straightforward as you might expect. The type of renovation proposed goes a long way to dictating the loan required. If the wrong loan is chosen, you could be left with a pile of unexpected debt.
Know your renovating budget
Before considering refinancing, you need to have a clear idea of your budget.
If you underestimate your budget, you run the risk of getting knocked back from your lender.
I personally know a lot of homeowners who have estimated a budget of say $100,000 to do renovations, only to discover it will cost a lot more, which means you may have to reapply for the loan, which generally doesn't look good.
Be conservative with your projection. If you think you need $100,000, I’d recommend to apply for $150,000 just in case, if you can afford it. The budget is key - think of it as a busness plan.
The next step is to speak to your broker to determine which loan will suit your needs and objectives.
Line of credit loan (Home equity loan)
Also known as an equity loan, to be eligible, you must be looking to make upgrades to the cosmetic domain of your property.
Installing a new bathroom or kitchen, painting the interior or exterior of the house and other basic construction falls nicely under a line of credit loan.
These renovations, more often than not, do not supersede the costs of structural changes, so homeowners can call on up to 80 per cent of their Loan-to-Value Ratio (LVR).
A line of credit loan is a “revolving door” of credit that combines your home loan, daily spending and savings into one loan.
To calculate the value you can borrow, subtract your current loan balance from your property value and then multiply by 80 per cent. For example, if your property is worth $500,000, and you have $250,000 left on your loan, your home equity is $250,000. You then multiply this total by 80 per cent.
If you’re uncertain of your home value, contact us and we can assist you to arrange for an appraisal or valuation for no charge.
If you choose a line of credit home loan, it essentially works as a large credit card. You can use it to purchase cars, cosmetic renovations and other investments. However, the interest-only charge starts when the equity is drawn down.
Keep in mind, line of credit loans provide you with money that can gather interest quickly, so if you and budgeting go together about as much as a Politician goes with a sporting event, speak to us for a plan that matches your unique circumstances.
Construction loans
Construction loans are suitable for structural work in your home, for example, if you’re adding a new room or making changes to the roof.
Construction loans give homeowners the opportunity to access larger sums of money, with the amount dependent upon the expected value of the property after renovations are completed.
The advantage of a construction loan is that the interest is calculated on the outstanding amount, not the maximum amount borrowed. This means you have more money available in your kitty, but only pay interest on the money you choose to spend. For this reason, the broker may recommend that you apply for just one loan, but leave some leeway in your borrowed kitty.
When applying for a construction loan, council approval and a fixed price-building contract are required, which a BluePebble broker can assist with to reduce the paperwork and stress.
Your lender will appoint an assessor to value your construction at each stage of the renovation, which will happen before you pay your instalment. When construction is complete, speak to your broker as you may be able to refinance back to the loan of your choice.
When looking at both these loans, consumers can call on other property they own to boost their overall borrowing amount if they wish.
Depending on the your circumstances, you can use other property to get a line of credit and a construction loan.
BluePebble Advice
If you speak to your BluePebble Broker, they will be able to determine which loan will give you the options you seek. Professional advice is essential, as a poorly planned construction loan could cost you much more down the road.
You should ask your mortgage broker, ‘What type of loan am I eligible for?’, because if you don’t get your construction loan right, you may also be jeopardising your bank security.
While these specific options can be discussed with your BluePebble Mortgage Broker, if they aren’t suitable, there may be other options available to you.
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