Renovating your home

Style and substance: Renovating your home

Whether you’re renovating to suit your lifestyle or simply seeking to increase the value of your property, having a realistic budget and the right financial solution in place are key factors to making your renovation a good investment for your family.

The domestic housing market is currently experiencing strong demand, due at least in part to historically low interest rates. In a hot property market, purchasing a new family home can be an expensive exercise. Renovation has a number of benefits over buying, so it’s a good idea to weigh up what a renovation might cost, how to finance it and how you can turn it into an investment.

Home improvement

If you’re looking to add value to your property through renovation, you can afford to be strategic about what you prioritise. Before you get started, research what buyers are looking for and use your budget to target those areas of the property that will achieve the biggest bang for your buck. Your property needn’t be covered in gold – it just needs to be presented as better value for money than comparative properties.

Common ways to maximise the value of your property include:

  1. Adding a room or creating space by removing walls.

  2. Updating the kitchen and/or bathroom.

  3. Adding a second toilet or bathroom.

  4. Improving lighting and ventilation.

  5. Adding storage areas such as wardrobes.

  6. Adding secure car parking.

  7. Introducing an al fresco entertaining or dining area.

Renovating to create your dream home is a slightly different prospect, as the value of aesthetic and structural changes are subject to individual taste. People who renovate for this reason rarely do so to make a profit. However, it still pays to keep in mind the top price of properties in your area and to not overcapitalise.

Financing the facelift

There are a number of finance options available for renovators, depending on the size and scope of your renovation. If you already have a home loan, consider using it to fund the cost of your renovation, as the interest rate will be lower than obtaining separate unsecured finance.

There are several ways to do this, including a home equity loan, a construction loan, a line of credit, an offset account or mortgage redraw facility. The method you can access is likely to depend on whether you’re making structural or cosmetic changes to your home.3

Home equity loan

Equity is the value of your home remaining after you have deducted the cost of your mortgage. A home equity loan thus allows you to borrow against the value of your home, commonly referred to as a ‘second mortgage’.

If, for example, your home is worth $800,000 and your mortgage is $500,000, your equity is $300,000. You won’t be able to borrow against the full equity of the property, however, so you’ll need to negotiate the amount you can unlock with your lender.

Construction loan

Like a home equity loan, a construction loan works by allowing you to borrow against the value of the property. In this case, the lender will take into account the value of the property after renovation.

If your renovations will add $100,000 in value to your $800,000 home, the lender calculates your equity at $900,000 minus your current mortgage. The loan amount is generally released as renovations progress to ensure the funds aren’t used for other reasons.

Line of credit

This is a feature of many home loans that gives you the freedom to draw (up to a set limit) additional funds from your home loan. The main benefits are convenience, as you can access these funds through ATMs, EFTPOS or a specially issued credit card, and being able to borrow at the lower interest rate of your home loan compared to higher credit card rates.

Offset account

An offset account is a transaction or savings account that operates in conjunction with your home loan. The balance of funds in your offset account is deducted from your outstanding home loan balance, reducing the interest you pay on your loan. You can access the funds in your offset account at any time through ATMs, EFTPOS, online or phone banking.

For example, if you have $50,000 in your offset account and a $500,000 mortgage, interest is only charged on $450,000. If you then withdraw $10,000 to fund your home renovations, you’ll be charged interest on $460,000. So by using funds from your offset account to cover the cost of your renovation, you’re effectively paying the same low rate of interest on your renovation costs as for your mortgage.

More on offset accounts: How to repay your home loan faster

Mortgage redraw facility

A mortgage redraw facility allows you to access any extra payments you’ve made over and above your minimum monthly repayments. By redrawing money already paid into your home loan, you can finance your renovation on the same terms as your home loan.

Whether you’re looking for a more suitable home or aim to make money in a rising property market, planning a renovation is exciting and the temporary displacement is well worth the end result.