Refinancing isn’t as straightforward as you might expect. The type of renovation proposed goes a long way to dictating the loan required. If the wrong loan is chosen, you could be left with a pile of unexpected debt.
Know your budget
Before considering refinancing, you need to have a clear idea of your budget.
If you underestimate your budget, you run the risk of getting knocked back from a lender, according to an MFAA accredited finance broker, Sarah Eifermann of SFE Loans. “Often people underestimate just how much the renovations will cost! Or if their property is an older house, they run into complications once the job starts. It’s also not an option really to go back to the bank once the work has begun on the security, so always give yourself a buffer of at least 20% of the total cost. Often if possible, I like to suggest clients have at least $20,000 extra than required to ensure they have the funds to complete their project. Be conservative with your projection, and stick to your budget”
The next step is to speak to your broker to determine which loan will suit your needs and objectives.
Another important factor to consider is whether the renovations are structural or cosmetic. This changes the banks position on lending money, and could also mean you need a registered builder to perform the work.
A Term Loan with Offset
Also known as a Variable Rate loan, one of the satisfactory purposes for borrowing on this type of loan is to make upgrades to the cosmetic domain of their property.
Installing a new bathroom or kitchen, painting the interior or exterior of the house and other basic construction falls under this loan type.
These renovations, more often than not, do not supersede the costs of structural changes, so homeowners can call on up to 80 per cent of their Loan-to-Value Ratio (LVR).
To calculate the value you can borrow, subtract your current loan balance from your property value and then multiply by 80 per cent. For example, if your equity is $250,000. You then multiply this total by 80 per cent. If you’re uncertain of your home value, contact Sarah at SFE Loans who can assist you to arrange for a property report or valuation.
Keep in mind, when drawing equity from your property into an offset account, you have full control of the spending and so if you are ill disciplined with repayments or money, speak to an MFAA accredited finance broker Sarah Eifermann for a plan that matches your unique circumstances.
Construction loans are suitable for structural work in your home, for example, if you’re adding a new rom or making changes to the roof.
Construction loans give homeowners the opportunity to access larger sums of money, with the amount dependent upon the expected value of the property after renovations are completed.
The advantage of a construction loan is that the interest is calculated on the outstanding amount, not the maximum amount borrowed. This means you have more money available in your kitty, but only pay interest on the money you choose to spend. For this reason, Sarah may recommend that you apply for just one loan, but leave some leeway in your borrowed kitty.
When applying for a construction loan, council approval and a fixed price-building contract are required, use a broker to reduce the paperwork and stress.
SFE Loans will appoint an assessor to value your construction at each stage of the renovation. This will happen before you pay your instalment. When construction is complete, speak to your mortgage broker as you may be able to refinance back to the loan of your choice.
When looking at both these loans, Sarah says consumers can call on other property they own to boost their overall borrowing amount if they wish.
“Depending on the client, they may be able to leverage the equity in their current property or even another property they own to get the funds they need for renovation. Or they might get a typical construction loan if there is going to be an extensive framework change on the building,” says Sarah at SFE Loans.
When speaking to SFE Loans, we will be able to determine which loan will give you the options you seek. Advice is essential, as a poorly planned construction loan could cost you more down the road.