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 is the second in a series (read the first article here) outlining the different ways a renovation can be funded and how you can navigate the huge range of 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!
A fixer-upper is the reality for most people buying their first home or investment property; and more often than not, the fixing really needs to happen sooner, rather than later. In some cases this means there isn’t enough money in the property to leverage any equity to pay for the work.
A way around this problem is to take out a personal loan. While a lot of people associate personal loans with cars, boats and holidays, they can also be a really useful way of accessing money in the short term to improve your property.
Usually ranging from about $5000 up to $50,000, a personal loan is an unsecured loan, which means it just sits out on its own and is not attached to your property. Using this money for renovations is a clever way to build equity in your home quickly; because once the work is complete, your house can be revalued to factor in the improvements. In turn, this allows you to refinance your home, pay back the personal loan and take advantage of cheap home loan rates.
Here’s how it works.
Hannah and James were a young couple who came to see me after buying their first home for $380,000. They loved the house, but it wasn’t in an area that was going to increase in value quickly; and the bathroom and kitchen both needed to be renovated immediately to make the house comfortable.
Because it was their first home, they were unable to borrow any more money than the value of the house. So I suggested a personal loan for the $30,000 it was going to cost them to install a clean and functional new bathroom and kitchen.
Once the work was complete, we had the house revalued. With the valuation coming in at $420,000, we were able to refinance the home and use the equity to pay out the personal loan.
There are a number of reasons for immediately paying out the personal loan:
- The rate – personal loan rates are higher than home loans, so it makes sense to pay out the loan and take on the debt at a cheaper rate.
- The term – personal loans will always have a shorter term than a home loan – usually seven years at a maximum, as compared to 30 years on a home loan.
- The repayment – because home loan terms are longer, your payments are lower, so your living expenses come down and you can bring your spending under control and back within your budget. And of course, home loans can be structured so you can pay them off faster if that suits your situation.
— Paul is the Director of CVG Finance, a leading brokerage offering financial services across all areas.