Home improvements can be financed with a new loan or by utilising equity. What sort of finance you need within these options will be dependent on the extent of your improvements and your financial position. We outline the most common funding types here:
‘Topping Up’ your loan means increasing your loan amount against the equity of your house. You keep the same mortgage product and features, but ‘top-up’ your limit to release additional cash for home improvements. Keep in mind that increasing your loan limit will also mean increasing your repayments.
If you’ve been making lump sum or regular additional repayments to you home loan you may be able to withdraw them and put them towards your renovations. Check with your credit advisor if this facility is available on your mortgage and, if not, note it as a possible feature you’d like to look at next time you refinance.You’ll be increasing the long-term interest on your loan by redrawing, you may like to counteract this by increasing your additional repayments. Lastly, remember to check if there are any associated fees to redraw with your lender.
It might be time to reassess your mortgage rate and features. If this is the case, wrapping an equity release in to a refinance is a good way of freeing up cash to renovate. While your loan limit will be based on your income and equity you hold, remember that lenders generally won’t allow you to borrow more than 80% of the value of the property.
Line-of-Credit/Home Equity Loan/Second Mortgage
Based on the current market value of your property and your mortgage balance, this type of finance allows you to use your home equity as security to borrow money using a new loan for the purposes of property improvement. Again, most lenders will only allow you to borrow at or below 80% LVR without applying Lenders Mortgage Insurance.
Taking Out A New Loan
Construction loans are a multi-step process designed for new builds or major structural renovations. Once you have drawn up plans and agreed on a fixed price building contract with your builder you will be able to finalise your construction loan. The lender will conduct a valuation on an “as if complete” basis, likely producing a higher number than your current property value. Construction loans are provided as progress payments before which the lender generally has the right to conduct an inspection. As the payments are progressively drawn you will only pay interest on the amount you have accrued on the loan, reverting to principal and interest after the last progress payment.
Personal Loans & Credit Cards
For smaller renovations, personal loans and credit cards can provide fast funds to complete cosmetic improvements on your home. Remember, however, that these forms of credit come with much higher interest rates. Consider how long it will take you to pay down the debt and compare it to other lending options.
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