A Guide To Finding The Best Renovation Home Loans
While it may not cost as much as buying your first home, deciding to renovate a property can be a time-consuming and expensive process. Even if you have enough for the initial outlay, delays and unexpected costs can hit your hip pocket hard. That’s why so many Australians decide to take out a renovation loan.
It doesn’t matter whether you’re upgrading your home for lifestyle purposes, preparing it for sale or giving a dated property a total makeover – renovation loans can help make it happen. Here’s what you need to know about getting a loan for your next renovation.
A renovation loan could mean taking out a separate construction loan, accessing equity in your current property, refinancing to take out a bigger loan, or getting a personal loan for smaller reno jobs.
You may be able to borrow up to 95% for a renovation loan, depending on the lender. Having a licensed builder can also help you secure more funds than going DIY.
Be aware that taking out a personal loan – while giving you faster access to money – usually means paying a much higher interest rate than a construction loan or refinancing your current home loan.
What is a renovation loan?
Depending on which lender you decide to go with, a renovation loan could mean several different things. There’s the construction loan, which is based on the estimated value of your post-renovation property.
If you have owned your property for some time and have built up a moderate amount of equity, you may be able to access that home equity to cover the cost of your renovations. This can be achieved via a redraw facility, home loan top-up or a line of credit loan.
Alternatively, you may decide to refinance your existing loan in order to secure the appropriate amount of funding for your reno. By switching to a larger loan with a lower interest rate, it can be more cost-effective over the long term while giving you the cash you need to pay for renovations.
For smaller renovation projects, a personal loan may be the most appropriate solution. You’ll receive a lump sum fairly quickly, but be aware that these types of loans are often saddled with much higher interest rates than standard home loans, so it may end up costing you more than you anticipate.
Who qualifies for a renovation loan?
That depends on the type of home renovation loan you want. Getting a construction loan may be the most appropriate for larger jobs, as it pays out in stages rather than releasing all the funds at once.
However, if there are unexpected costs that aren’t covered under your construction loan, you’ll either have to pay out of pocket or apply for another loan, which can be time-consuming and even affect your credit score.
You may be able to access your home equity through a redraw facility or line of credit, but you will need to have enough equity in your property already to secure the funds.
Alternatively, refinancing could help you cover the costs of the renovations, but remember that there are fees associated with refinancing, and taking out a bigger loan will likely mean higher repayments over the life of the new home loan.
What kind of loan is best for home improvements?
Depending on the size, estimated length of time needed and your current financial situation, standard renovation loans may be best. For smaller jobs where you want access to money quickly, a personal loan may be enough to take care of all the reno costs. However, the higher interest rate may be a barrier to some.
Construction loans can make everything easy, as the funds are released in stages according to progress on the renovations. Alternatively, if you are happy increasing your mortgage repayments over the life of your loan, you may want to refinance to cover the costs of your renovation.
Bear in mind the refinancing fees, and always look to get a lower interest rate on your new home loan compared to your current one.Compare & Save
How much can I borrow to renovate?
The amount you can borrow will depend on a few different factors, particularly around whether you are doing the job yourself or hiring a licensed builder. If you are only doing minor renovations and going DIY, most lenders will allow you to borrow up to 90% of the property value plus the cost of renovations.
Using a licensed builder may give you access to up to 95% of that amount.
Major renovations are a different story. You can usually only borrow up to 80% of the total value plus renovation costs, unless you have a contract builder. If this is the case, then you may be able to borrow up to 95%.
Are interest rates higher on renovation loans?
Higher interest rates aren’t a certainty for all renovation loans. If you are refinancing to cover the costs of the reno, for example, then you might actually be able to secure a lower interest rate than you are currently paying on your mortgage.
Construction home loans don’t differ too much from standard home loans, but you will want to ensure you compare lenders to find the best deal for your individual needs.
If you are planning to take out a personal loan for your renovations, then you should expect to pay much higher interest rates. The upside is you will generally get access to the funds quicker than if you take out a construction loan or refinance, but the downside is it may end up costing you more than other loan types.
What credit score is needed for a home improvement loan?
Lenders always want to reduce their risk. That’s why your credit score is taken into account when applying for a loan. The good news is that there’s no ‘set’ credit score you need in order to get a loan for renovations. Depending on your level of risk as a borrower, some lenders may reject your application for a loan, which can narrow your options. That’s why it’s important to compare what’s available to you.
The average credit score in Australia is between 500 and 700, and you usually won’t have too much trouble taking out a home renovation loan if you are in this range. However, that’s not to say that people with below-average credit scores will be instantly rejected. See what’s out there and speak to the lenders to find out what type of deal they can do for you.Compare & Save
Can you borrow extra money on your mortgage for renovations?
Yes! This is actually a popular method used by Australians who want to renovate their properties. Refinancing means you can take out a bigger loan (i.e. borrow extra money on your mortgage) to cover the costs of your upcoming reno. The best part is that you may be able to secure a lower interest rate than you are currently paying.
Just be aware that there are fees associated with refinancing, and it may take between two to four weeks to complete the process.
Is renovating your house a good investment?
In most circumstances, renovations improve the quality and value of a property, and are therefore a good investment for a future sale.
The key is to ensure you hire experienced builders and designers, and use high-quality materials that won’t significantly degrade over time. Renovated kitchens or bathrooms are usually the rooms that will add the most value to your property.
How do I find the best loan for renovations?
Doing the research yourself or finding a mortgage broker may be appropriate depending on your circumstances, such as your free time and when you want to begin the renovations.
The easiest way to find a home renovation loan is by comparing lenders online. With Compare Club we will scour the best loans from more than 40 lenders relevant to your particular needs. It only takes a few minutes and you can start the process immediately.
Ready to lock in a lender and get those renovations under way? Start comparing lenders right now with Compare Club.Compare & Save
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.