Renovating a house – for lifestyle or profit – is a big financial commitment. And for most of us, that means borrowing the money to do the work. There are lots of different ways to finance a renovation but the key to optimising your success is to find the one that best suits your situation.
This article is the first in a series outlining the different ways a renovation can be funded and how you can navigate the huge range of financial products to find out which is the best option for you. Renovating can be a stressful undertaking, so knowing you have made the right decision about funding your project from the beginning is a great way to start.
Option one: leveraging equity
One of the cheapest and simplest ways to finance a renovation is to release the existing equity in your home and make use of cheap home loan rates, with most banks offering a range of options when it comes to terms and conditions.
Josh and Penny were a young couple who came to see me to find out how they could finance a renovation they had planned for their first home. The couple were newlyweds when they bought their first house about four years ago. It was a basic two-bedroom, one-bathroom home with a combined living-dining space and an original kitchen.
Since buying the home with a loan of $300,000, the couple had not done any work on it besides maintaining it and keeping it neat and tidy. But in that time, their family had grown to include a new baby and they wanted to update the kitchen and redo the bathroom.
Josh and Penny had bought their home in an up-and-coming area, so we decided that releasing the equity in their home was the best way to go in terms of funding the renovation. A new valuation on their home came in at $500,000; and because they were able to borrow up to 80% of its value, they now had access to finances of up to $400,000.
Since their original loan was only at $300,000, it released another $100,000 for them to complete the work. This was far and away more than they needed to do the kitchen and bathroom, so they decided that while they were in reno mode, they would build an outdoor entertaining space as well.
We found the best loan available for them – which happened to be with their existing financial institution – and the money was made available to them in their redraw account. The valuation was free and the whole process was a stress-free way of financing their renovation, which finally cost $80,000, leaving them with a mortgage of $380,000.
Once the work was complete, we had the home valued again and that came in at $600,000, which was a great result for Josh and Penny, who had not only enhanced their lifestyle, but had also made a wise move in terms of investment.
— Paul is the Director of CVG Finance, a leading brokerage offering financial services across all areas.