Thinking about renovating or extending your home?
Have you been thinking about that new kitchen and flooring for a while now but don’t quite have the budget to afford the work? Is borrowing against your home an option? If you have enough equity in your property and your borrowing capacity is high enough – then it’s a possibility. Here’s a few practical tips that will help you transition from looking up ideas on pinterest to drawing up blueprints.
These renovations are generally of a cosmetic nature and don’t structurally change the layout or design of the home. Examples of non-structural renovations include a new kitchen, bathroom, flooring, painting, etc.
When borrowing for these sorts of renovations, most lenders will usually allow you to borrow up to 80% of your properties value to fund the work.
So what does that actually mean? Let’s look at an example.
John and Jane’s property is in Canberra. They’ve experienced some decent price growth in the last three years and have managed to pay down some of their loan. They estimate the value of their home as being $600k and they owe $400k. They need $80k to fund their renovations.
We ordered a free valuation for John and Jane and it came back at their $600k estimate. After assessing their borrowing capacity we worked out that were able to increase their loan. The bank agreed to let them borrow up to 80% of the properties $600k value and increase their loan to $480k. This provided them with the $80k they required for their renovations.
The process to release equity is usually quite straight forward. Your mortgage broker will order a valuation on your home (which is free with a lot of lenders). They will also assess your borrowing capacity to ensure that you can afford the higher loan amount and additional repayments.
Providing the valuation stacks up and your borrowing capacity is fine – they will submit an application for you. Once the application is approved the lender will post you out some loan offer documents to sign/return. Once you’ve returned your documents, the lender will prepare for settlement. On settlement day, the surplus funds for your renovations will be placed into your loan account for you to redraw or into an offset account for you to access.
If your construction work is of a structural nature then the bank will likely want you to take out a construction loan. These can be a bit more rigid and complex – and involve a lot more paperwork.
For a construction loan, the bank will want to see a “fixed price building contract” and plans for the intended work. The building contract and plans will then be provided to a valuer for them to complete an “on-completion” valuation of your property.
An on-completion valuation will consider the final value of the property in the future once the structural work is completed. Generally speaking – lenders will then lend up to 80% of the “on-completion” value but some will lend higher (but keep in mind that whenever you borrow above 80% of the properties value there will be a Lenders Mortgage Insurance fee payable).
So that’s it in a nutshell. When funding renovations you have two options – an equity release against your home (if the work is non-structural) or a construction loan (if the work is of a structural nature). The former is a relatively straight forward process whilst the latter can be a tad more complex and time consuming. Whichever options you go with – avoid over capitalising!
If you need help with releasing equity in your home – get in touch and we’ll look into your options.
If you’d like to have Jamie provide advice on your finance structure, investment strategy, first home purchase, upgrade or refinance simply complete and return this FORM and he will be in touch – this is a FREE, no obligation service.
The information herein is not intended as investment, financial, legal, taxation, building, development or any other advice and must not be relied upon as such. You should obtain independent professional advice and make further independent enquiries before making financial, legal, taxation, building, development or investment decisions.