Australians love renovating their homes. Whether it is to improve the house value (investors) or to extend the family home, it all depends on the balance between what you want to do versus the finance required.
Renovating Family Homes
As your family grows, there is a dilemma about renovation versus moving to a bigger house. The cost of selling and buying a house can be more expensive than renovating. Ultimately, it could be as simple as adding another bathroom, kitchen extension or a whole new storey.
Before you can renovate your family home, consider the questions below:
- Can you live through the disruptions during the renovation period? If you are expecting a baby, the last thing you want is more noise and stress!
- When you have a family, consider if renovation will help you achieve the desired lifestyle and needs for you and your family. Are you renovating so that your children can still go to the same school and live in the same safe suburb? If so, an architect should be able to help you make the most of the space available.
- Can you afford the costs of renovation and renting while your property is being renovated?
To renovate or move?
Here are a few general questions you can ask yourself to help you decide.
- Are your renovation plans likely to be approved by your local council? If not, you might want to make some changes or think of another option.
- Will your neighbors be supportive? There is nothing worse than upsetting your neighbors. It is social etiquette to let them know that you are renovating and there will be a certain level of noise.
- Do you have enough time to manage the project? If not outsource it or schedule for another time, unless you have a partner who can help with managing the project.
Renovation for Investors
- As an investor, consider the end value of your property. Sometimes if you spend $50,000 don’t expect your property to go up by $50k – it could be much less than that.
- Renovations that are likely to increase your house value include a new kitchen, bathroom, a coat of paint, landscaping/decking. It is good to consider the taste of potential buyers and renovate accordingly.
- Will the renovation be in style with the other houses in the street? If not, it could lower your house price.
Benefits of Renovating
Here is why you should be renovating.
- Renovations add resale value to your house. Even if you don’t plan to sell now, when do you end up wanting to sell your house, they could add a substantial amount to your property value.
- A few months of chaos can get you more space and a new look.
- If you are an investor, renovations can form a part of your tax investment strategy.
- Ultimately, renovation can help you achieve your choice and style of living, both interior and exterior, without moving houses.
Costs of renovating
- Always get written contracts with tradespeople. This can help you keep an eye on the costs without letting them eat into your budget later.
- One of the most time-consuming parts of the renovation process is getting council-approved plans. Unfortunately, this is a necessary part of the process and you need to take into account the time and effort involved.
- Depending on how much of a disruption you will have, you may need to move out and rent until the renovations are complete. This means you are paying rent on top of the mortgage repayments and other reno costs.
- Make sure that you take into account the end value of the project and that you don’t over capitalize.
Borrowing money for renovations
Here are a few different ways to fund your renovation.
1. Home equity loans: Let us assume your house is worth $600,000 and you owe $400,000 to the bank. Technically, you have $200,000 as equity. However, banks will only lend 80% (without LMI) or generally up to 90% (with LMI).
At 80%, your available equity will be $80,000.
80% * $600,000 = $480,000 minus $400,000 (loan) = $80,000 equity.
If this is all you need, then go ahead and top your loan. Banks may want to see contracts before they release the money.
2. Construction loan: Using the same example as above, where your house is worth $600,000, what happens if you need to borrow $200,000 for renovations? Your bank can lend based on the end value of the renovation.
Once build/renovation contracts are ready, they will carry out a valuation based on what they think the value will be post completion – called an ‘AS IF’ valuation.
In this case assuming the valuation is back at $800k, then you borrow 80% without LMI or up to the maximum that the bank will lend for construction (90% or 95% LVR).
Like a typical construction loan, your lender may control the release of funds in stages.
3. Personal loan: If you don’t have equity in your existing property and want to fund a renovation, a personal loan may another option. The disadvantage is that you will pay a high interest rate for a low amount of money.
Consider your options wisely and happy renovating.