Using Equity to Renovate Your Home

You don’t need to have bought a ‘renovator’s delight’ to find delight in renovating. Plenty of Australians love to renovate.

We have set out below some general comments on the pros and cons of using equity to renovate below. 

The benefits of renovating

In terms of the financial benefits, homeowners turn to renovations as it can often be cheaper than buying a new home or building an entirely new home, and it can create more potential for property investment opportunities down the track.

Funding home renovation

Depending on your financial position, there are a few options when it comes to funding home renovation.

Use Savings

There’s every possibility that, like a lot of Aussies, you were able to save some money during the last couple of years thanks to restricted travel ability and lockdowns. If you’ve got enough in the kitty to pay for your renos outright, then this is a great way to cover the costs of improving your home. This is one way you wouldn’t need to access equity in your property, which could be beneficial if you’re looking to sell while the property market is red hot.

The other benefit of using your own cash is that you don’t need to increase your debt level or pay interest on the amount it costs to renovate. This strategy also means that you wouldn’t need to undergo a credit check; if you’ve applied for another credit product recently, such as a loan or credit card, an additional credit application may reflect poorly on your credit file. The other downside to using your savings account is, naturally, that you then deplete your savings that could be used for other wants and needs, such as a new car or family holiday.

Borrow money

Redraw facility or Line of Credit

If your home loan lender or mortgage broker set up your home loan with a facility to redraw or a line of credit, you may have a sufficient balance to pay for your renovation project. Unfortunately for most account setups though, taking money from your redraw means that you are then increasing the principal amount of your home loan, leaving you to pay interest for the remaining duration of your home loan.

Home equity loan

One of the biggest drawbacks of any home loan available is that adding debt to your existing loan means increased loan repayments. If you face any difficulty in repaying the loans, you may risk losing your home, as the lender is able to repossess your property to recover the debt. This also goes for a second mortgage or increasing your existing home loan amount.

The other drawback of using the equity in your home to secure a new loan is the fees that can be involved. You might face:

Additional fees

• Break costs can occur if the lender faces a financial loss from re-arranging your home loan. You could also incur costs for a second mortgage, or rearranging your lending structure.

Valuation Fees

• To determine your property value, your credit provider may request a professional valuation on your home, which can come with some hefty fees. Valuations determine your home value in the current property market, which is necessary for calculating how much equity you’ve got sitting in your property value.

Legal Fees

• Depending on how your loan option is structured, there may be legal costs associated with accessing the equity in your property.

You might need to pay lenders mortgage insurance

• Lenders mortgage insurance (LMI) is a type of insurance that helps protects lenders in the event that you default on your home loan, and they have to sell your home for a lower price than what you owe. LMI is usually payable when your Loan-to-Value Ratio (LVR) is more than 80%. This simply means when the debt against your home is more than 80% of its value.

• In a market where home values are cooling off, and interest rates are going up, LMI should be a major consideration when looking to access equity within your home.

Personal loan

Personal loans may not be your first port of call when looking at your options to fund renovations. However, they can be beneficial, particularly if you’re looking at minor renovations, don’t have enough equity at the moment, or just need some extra funds to add to what you’ve already got in savings.

The benefits of using a personal loan to fund renovations include:

• Not needing to stretch your home loan to your maximum borrowing capacity and as a result, you keep more equity in your home.
• Depending on who you get a personal loan through, you can make additional repayments or extra repayments without being financially penalised.
• Smaller loan amounts mean you can repay the additional debt quicker, which could help your financial situation.

Some Frequently asked questions about using home equity to renovate