If you have renovation ideas to add value to your home but you aren’t sure how to pay for it, this information on your various options might help.
Cash
Using your own money is the cheapest way to fund your renovation budget, so if you have cash or savings that aren’t tied up or earmarked for other things, use it!
Pros:
- No interest, fees or charges
- You don’t owe anyone anything
Cons:
- Most people don’t have available cash sitting around
- It will use reserves you had for a rainy day
Redraw
One of the cheapest forms of interest is using your home loan, so if cash isn’t an option and you’ve been making advance payments on your loan you may be able to redraw that money for your house renovation costs. Remember, you can only redraw up to the amount of additional payments you’ve made, which might not be enough.
Pros:
- Quicker access to the money
- You’re essentially using your own savings
Cons:
- Not all loans have a redraw option
- Some lenders charge redraw fees
- Redrawing will increase your loan balance meaning you pay more interest on your loan
- Repayments will be spread over the remaining loan term which may mean a higher total interest bill for you (remember that most mortgages run for 25-30 years)
Refinancing
Refinancing is a common way to raise a renovation budget. This can be done by taking out a new loan or extending your current loan. Refinancing with a new lender may mean you get a better deal through a lower rate or better loan features. But make sure you fully understand all the costs involved.
If you’re happy with your loan and lender, extending your current loan can avoid the costs associated with refinancing.
Alternatively, if you’ve had your loan for a while, you may have built up equity in your property which you can also draw on to fund your renovation, or secure a Line-of-Credit from your own or a new lender.
Pros:
- Lower interest rate than a personal loan
- If you’re disciplined and pay off the loan as quickly as you would a personal loan you’ll save money
- You may be able to borrow a larger amount more easily
Cons:
- Making the minimum repayments will stretch the loan out so you end up paying more
- Borrowing more than 80% of your property’s value will get you back into costly Lender’s Mortgage Insurance territory
- It can take longer to access the funds
- Refinancing can occur additional costs such as up front valuation and application fees, exit fees or other bank fees
Before signing up for something seek professional advice and information from your financial advisor or a your local Aussie broker.
Personal Loan
A personal loan can help turn your renovation ideas into reality quickly, easily and with repayments that suit your budget. If speed of approval, access to money quickly and time to repay the loan are important, then a renovation personal loan may be the way to go.
There can be restrictions on what type of renovations you can complete using a personal loan. If it’s structural where you need to knock out a load-bearing wall or add another floor then a personal loan might not be suitable. But typically cosmetic renovations such as installing a pool, landscaping or adding a new kitchen or bathroom can be done on a personal loan.
Pros:
- Faster application, approval and access to funds
- Shorter repayment time means you’re cleared of debt sooner
- Total interest paid may be lower because the term of the loan is shorter
Cons:
- There are limitations on what renovations can be completed
- Over the same time-frame you may pay more interest with a personal loan than a home loan
- You will be charged an application fee
Loan repayment calculators can help you work out what’s more cost effective and suitable for your renovation budget.
Credit Card
If you’re able to pay off your renovation ideas quickly or you can secure a card with zero-interest for a period of time, a credit card can be an easy way to fund your renovation. Before going ahead be sure to check that your various suppliers will accept payment by credit card.
Pros:
- Easy access to funds
- Low minimum repayments (compared to a Personal Loan)
- Low rate credit cards can have attractive interest rates (not to mention introductory offers for new accounts)
Cons:
- Smaller credit limits might not be sufficient to cover the cost of the renovation
- Making just the minimum repayment can mean much longer loan term (and total interest cost)
- Interest charges may be higher than other loan options
- Beware the temptation for ongoing spend on the card if you are trying to pay down the amount outstanding.
If you’ve recently renovated your home share your story with us. How did you fund it?
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