All the latest news, facts and tips from the team at Pioneer Credit Connect

Oct 18

Proactive ways to fund your home renovation!

by Matthew Ikin

As the blankets of frost begin to be replaced with picnic rugs, one thing is for certain, springtime is almost here. Whilst it’s difficult for your reno ideas to come to life when it’s cold and wet, as the weather starts to heat up, so does renovating season. The start of the warmer months is the perfect encouragement to dust off the cobwebs and get started on transforming your home into something more modern, functional and better suited to your life; because hey, that’s what renovating is all about. The best part? If you start now, you should be able to enjoy the fruits of your labour in time for summer. Did someone say pool party?

Renovations usually have one core purpose, to add value to your home. Whether this is monetary value or otherwise renovating is one of the best ways to skyrocket the value of your home. A good renovation can be an investment as much as it can be a creature comfort, however, it’s not always possible to fund the property updates with our savings.

Significant home renovations typically cost thousands of dollars, and on occasion, the decision is made out of necessity, like a new baby on the way, or Mother Nature crashing down on your home.  If you’ve unexpectedly got a new baby on the way and require another bedroom, you might not have the time to save up for that new home extension before the little one arrives.  Or maybe your parents are getting old and you’d rather build them a nice granny flat than put them in a home? Whatever the situation may be, if you need to finance your renovation, what should your strategy be?

Before you consider the best way to fund your renovation, you should figure out an estimate for the total cost of the work. Figuring out the cost of the work enables you to create a budget (and hopefully stick to it!). Now you know how much you need to save or borrow. This means that you’ll end up with the right amount of money to fund the renovation, helping you to avoid spending the money on other things  after the renovation, which can be the case if you borrow too much.

So, you’ve done all the planning and costing for your home renovation; now it’s time to discover a way to fund it that is right for you.

$50,000+ Renovation

The first method of financing that might come to your mind is using a home loan. After all, a home loan is for your home. A home loan top-up is a great way to fund a more extensive home renovation that will cost upwards of $50,000, something such as a granny flat or a complete overhaul of your backyard; we’re talking a new pool, new entertaining area, all the bells and whistles.

The application process to refinance your home loan can be lengthier than that of a personal loan, however, a home loan typically has a much lower interest rate than a personal loan, so the savings that you can take advantage of will usually make it worthwhile. Borrowing more money on your home loan involves refinancing your home loan which will increase the size of your mortgage. This extra money can then be used to pay for the renovation!

If your situation dictates that a home loan top-up is the way to go, you won’t have an extra payment to manage as it will all be bundled into your mortgage. When it comes to managing your personal finances, one repayment can be a great advantage, however this does come with a trade-off. Home loans typically have higher establishment fees, certain costs in place for making extra repayments and naturally, take longer to pay off. Seeing as interest is calculated on the total balance left to repay, if you were to borrow more on your home loan to pay for the renovation, you could end up adding another few years to your mortgage with compound interest at play. Take a look at our handy repayment calculator to see how topping-up your home loan could affect you!

Tips from the Pioneer team…

  • Ensure you’ll be able to afford the larger repayments before you take on the extra credit.
  • Be wary of fees that you may get hit with such as application fees, extra account management fees, fees for making extra payment etc.
  • Make sure you know how much more time it may take to pay off your mortgage before topping-up the balance.

$5,000 to $50,000 Renovation

One of the most straightforward ways to fund a home reno is with a personal loan. Despite the ease of accessing funds, personal loans are often overlooked as it is more common to redraw on the home loan. If your home loan renovation budget is between $5,000 and $50,000, a personal loan could be the most cost-efficient choice – some lenders will finance even more if you prefer to avoid the home loan route.

Whilst personal loans usually have a higher interest rate than home loans, most have the option to be secured which can allow you to enjoy a discount on the interest rate – every percentage point makes a difference. Personal loans also often give you access to features that you might not be able to get with a home loan such as no monthly fees, the ability to make extra payments, and also having the flexibility to choose how long you want to take to repay it.

But that’s not the only reason that a personal loan can be a great way to fund your reno; in most cases, personal loan applications have very fast turn-around times which means that you can start your renovation much earlier than if you were to fund it with a home loan.

Personal loans will also have shorter loan terms of say 2-7 years, as opposed to 15+ years. In most cases your lender will let you pick a term between 2-7 that suits you and provided you make your repayments on time, your loan will be paid off in that time frame. Remember to be cautious with short term loans that are less than 2 years as they may start to edge into the payday loan realm which is usually not the right solution.

A few Pioneer tips...

  • Try to find a personal loan with no monthly fees
  • Make sure that you have the ability to secure it with your house or car so that you can get access to a lower interest rate
  • Shop around for features such as flexible repayments and no early exit fees

Under $5,000 Renovation

If you’re going for a more modest makeover, such as re-landscaping your garden or putting a new lick of paint on the wall, you’re better off digging into your savings or setting up a savings plan so you can afford it outright. Whilst you may be tempted to reach for the credit card in your pocket, home improvements in this price range won’t usually take that long, so, provided you have the patience, you can probably give yourself the time to save up and you’ll be much better off for it! If you don’t have the patience, putting some of the initial costs on your credit card until you have some more savings might be a good short-term solution – just proceed with caution to avoid the credit card debt cycle.

One thing to be weary of with credit cards is the higher interest rates. Credit card interest rates can be up to twice the interest rate of personal loans and up to five times that of a home loan. For this reason, they would be more appropriate for a smaller renovation than a personal loan, however you should still be very careful not to get carried away in the store – credit card interest can sting.

Another thing to consider if you are thinking about using a credit card is the balance that you have on it. If your credit card is near its limit, you might not even be able to use it to pay for the whole renovation. In this case, you might find yourself having to pay down the balance until you are able to spend on it again. If this is the case, you are likely better off waiting until you have some savings or have paid off your credit card. The only thing we want looming over your head at the end of the renovation is a brand-new patio, not more credit card debt!

If you think a credit card or savings are the way to go…

  • Ensure you don’t already have an overdue balance on your credit card
  • Check to see how close you are to your limit on your credit card
  • Ensure you spend your savings on the renovation only and keep a healthy emergency fund on the side, after all that’s what you saved up for!

What now?

When it comes to paying for your renovation it’s not just the cost of the renovation that should dictate your choice, consider other things as well, such as whether you’re in a position to afford a renovation or if now is even the right time for a renovation. Renovating is an exciting time, so approach ‘the money bit’ with caution and become even more home proud.