How to refinance to renovate?

Refinancing your assets to renovate your property is a significant decision that will hopefully improve your standard of living or add substantial value to 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 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, there are quite 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, this means they may have to reapply for the loan, which banks generally don’t like.

Be conservative with your projection. If you think you need $100,000, it's recommend to apply for $150,000 just in case, if you can afford it. However, the key is stick to your budget as much as possible.

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, one must be looking to make upgrades to the cosmetic domain of their property.

Installing a new bathroom or kitchen, painting the interior or exterior of the house and other basic construction falls under a line of credit loan.

These renovations, more often do not supersede the costs of structural changes, so homeowners can borrow up to 80% of their total 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. For Easy2Mortgage calculators, click here.

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 starts to charge when the equity is drawn down.

Keep in mind, line of credit loans provides you with money that can gather interest quickly, so you must be disciplined with your repayments, speak to an Easy2Mortgage finance broker 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 you to apply for a loan that leave some leeway in your borrowed kitty.

Your lender will appoint an assessor to value your construction at each stage of the renovation. This will happen before you pay your instalment. When construction is complete, speak to your mortgage broker as you may be able to refinance back to the loan of your choice.

When looking at both of these loans, depending on the client's financial situation, to boost your overall borrowing amount you can use other properties you own, if you wish.

Broker advice

If you speak to our brokers, we will be able to determine which loan will give you the options you seek. This advice is essential, as a poorly planned construction loan could cost you more down the road.

While an Easy2Mortgage broker can discuss these specific options with you, if they aren’t suitable, there may be other options available to you. Speak to us to make your grand renovation plans a reality.