This is a complete guide to home renovation loans in 2020.
And let me be clear about something:
This is NOT some lame guide written by a back-office banker.
I’ll cover some of the most important trends in renovating your home in 2020, you’ll learn:
- How Renovation Loans Work
- How to Renovate on a Budget
- Different ways of financing your home renovation
- Dozens of Home Improvement Loan best practices
- …And one advanced technique to get your renovation loan quicker
In short: If you are looking to renovate your home or investment property, you’ll love this guide.
Let’s dive right in.
- 1. Renovation Loan Basics
- 2. Types of Renovation Loans
- 3. Time to Crunch the Numbers
- 4. Renovating on a Budget
- 5. Advanced Tips and Renovation Loan Best Practices
- 6. Now it’s your turn
1. Renovation Loan Basics
It’s no secret that renovating can be a short cut to increase the value of your property.
Renovating can cost less than buying a new property. And the best part is, that you get your own say on it.
The good news is, qualifying for a home renovation loan can actually be made easy and I’m going to show you how.
How much can I borrow?
Now it’s time to figure out how much you can borrow.
Typically, how much you can borrow comes down to what sort of renovation you want to do.
There are about five different categories that your renovation loan can fall into, and knowing these categories will help you get finances sorted.
|Scope of renovations||Builder Involved||Maximum Borrowing||Example|
|Non structural, or minor renovations||Not necessary||90% LVR based on current property value||Painting inside of house, or adding air conditioning|
|Structural, or major renovations||Yes||95% LVR based on ‘as if complete’ value||Adding a new room, lifting a house, adding a new kitchen.|
|House rebuild||Yes||95% LVR based on ‘as if complete’ value||Buying a block of land and adding a house|
|Adding a granny flat||Yes||95% LVR based on ‘as if complete’ value||Buying an external house, or granny flat extension.|
|Not intending on doing renovations||No||80% LVR based on current property value.||Using equity for personal purposes, not wanting to renovate.|
|All of the above||Yes||105% LVR based on current property value plus the help of a guarantors property.||Only available with the help of a guarantor.|
As you can see the scope of your renovations are largely going to determine how much the bank is going to lend you.
Will the loan be paid in stages like a construction loan?
Now when it comes to payment, this comes down to the size of the job and the scope of the works.
If the loan is less than $100,000, say for non-structural minor renovations then you can control payments. Meaning you will pay the job on completion to the builder or contractor.
For larger jobs, just like a complete rebuild or lifting a house, the bank will be looking for progress payments to be made (the same as a construction loan).
When should I apply for a renovation loan?
If there’s one thing I’ve learnt in the industry, it’s that the banks make all the rules.
To get the upper hand, I recommend you apply in advance to take some stress off yourself.
Now there are two ways applying for a renovation loan can go.
The first is Jane’s situation, where she has a lot of equity in her property. Jane applies to release equity, using the current value of her home (before renovations) which should take about a week or two to get approved.
The other, more realistic situation for many is Charles’ circumstance.
Charles had very little equity, so he had to allow for two to three weeks for the renovation loan to be approved. You are going to need a signed building contract, and will rely on the ‘on completion’ value of your property.
What are the most popular types of renovations?
Your type of renovation will determine how much money you’re going to spend.
And when you decide on this, you’ll get a better idea of the timeframe and costs involved.
Enter: the most popular types of renovations
Non structural, or minor renovations
As I mentioned above, non structural and minor renovations will rely on the existing equity in your home. We will arrange a bank valuation to determine the current value of your home, and you can borrow up to 90% of this amount.
In other words, if your home is worth $500,000 you can borrow up to $450,000. If you owe $400,000 at the moment you’ll have $50,000 towards your renovations.
Think of this like a facelift but for your house.
It’ll come out looking new and fresh, but underneath, nothing has really changed. Cosmetic renovations include things like painting the house, covering the floor, cleaning up and restyling the garden and so on.
If a large surface area like the floor has dirty old carpet, changing this can give you the best bang for your buck. The best part is, it’ll improve the entire feel of the home without too many costs involved.
Kitchens and bathrooms
Often, these are the areas that have the most significant impact on a person’s impression of a home. The kitchen is considered to be the heart of a home, so having a fresh and updated kitchen can affect the overall look and feel of your home.
Heck, it’s the first thing I look at.
(Because it can be one of the more expensive parts of the house to renovate)
Get a swimming pool
In Australia’s balmy Sunshine State, this is what all the locals are looking for. Getting a pool installed in the backyard can add value to a home, at least where weather permits maximum use of it anyway.
There’s no doubt in Queensland it will. But if you’re in Tasmania, maybe not so much.
Structural, or major renovations
Structural renovations mean your renovation game will need to step it up a notch.
Here we’re talking about knocking down walls and switching up rooms, maybe even changing how the actual house flows. This type of renovation can be a costly way to do things and is not the most desirable form of restoration due to the fuss around it.
This is where the bank will arrange an ‘on completion’ valuation taking into account the major structural renovations you are doing.
So if your home was worth $500,000 but you are getting $100,000 worth of structural renovations to add an extra bedroom, and update the kitchen – its possible the bank will value the as if complete home at $600,000 – and let you borrow based on this amount up to 90%!
More space! I recently turned my garage downstairs into two extra bedrooms, and we’ve appreciated having the extra space.
But one thing you need to do before you go ahead and throw in some new walls is to get council approval.
2. Types of Renovation Loans
Your renovation loan type can make or break your entire application.
So it’s crucial to nail this step.
And to help you with that, here are a handful of strategies for renovation loans and how they work.
How do renovation loans work?
As I explained in Chapter 1, setting up your finance as early as possible will help you increase your chances of everything going smoothly.
It will also give you a more precise budget so you know how much you can spend.
But understanding how exactly a renovation loan works is an essential part of the process so that you can anticipate and prepare for each step of the way.
There’s not one single way that a renovation loan is set up… there are many.
The type of renovation loan comes down to your personal circumstances.
So in the next chapter, I’m going to go through the different types of renovation loans that you can apply for.
Types of renovation loans
With shows like The Block, there has been a massive increase in renovations.
But the reality is, renovating can be a consuming and tiring process.
By getting your finances sorted, this will help make the process a little easier and ensure that your funds will be approved.
These are the six types of renovation loans you need to know about.
Situation 1: Home equity loan, or increase your existing home loan
This one is our go-to for those who have equity in their current home. So for homeowners that are already established, you can borrow up to 90% of the value if you already own the property.
But what’s the risk? If your renovations cost more than the equity in your home, this is where it can get a little messy as you can run out of money.
(Like I did)
The solution? Do a cost analysis and stay within your budget to streamline the process.
The benefit of a home equity loan, is It allows you to spread the costs over a long period and potentially borrow up to 90% of the value of your home.
In some cases, you’ll have access to more favourable rates, better than credit card and personal rates.
Situation 2: Construction loan
Not far from a home equity loan, but the difference is the final value of your home after renovation is considered. You won’t have access to the total loan upfront; instead, it will be dripped out over a time frame.
So if you’re looking for a bulk sum of money at your avail, this isn’t that kind of loan.
Read More: How Does Construction Finance Work?
Situation 3: Line of credit
A line of credit is terrible, don’t use it.
It’s basically a credit card type facility with a higher interest rate, and only has interest only repayments.
Interest is only paid on the money you use, and as you pay down your balance, you can continually re-borrow the funds without going through the hassle of reapplying.
You can get the same benefit from doing a home equity loan as per situation 1, but on a lower rate.
Situation 4: Personal loan
If just a few cosmetic renovations are what you have in mind, then a personal loan could be all you need.
You’re looking at around $30,000 max, but the catch is interest rates on personal loans are higher than standard home equity loans. So proceed with caution and do your research.
Similar to credit cards, I would suggest extreme caution before jumping into a home reno with a personal loan.
While lots of guides might say can help you get the renovations started quicker, what they forget to mention is the advertised interest rate is more of a starting rate – rather than the final rate.
If you’re considering a personal loan, speak with our expert mortgage brokers to see what your options are – or give us a call on 1300 088 065.
Situation 5: Credit cards
If you’re thinking about making just a few, minimal renovations this one could be good for you.
But interest rates are often a lot higher in credit card fees compared to mortgage rates.
(I’m talking 21.45% interest rates here)
So while lots of different guides suggest you use a credit card, I would give it a second thought before jumping in.
Where you benefit here is if the project is small, then it could work out better in the long term due to all the establishment fees you’re skipping out on.
And you can potentially refinance the credit cards (like I did) if you have increased your properties value.
Banks that do Renovation Home Loans
While you would expect all banks to be able to help with doing renovations, it actually isn’t the case.
Here are a few banks that will consider loans to help with improving your home:
- Commonwealth Bank: How to Finance Your Renovation
- NAB: Renovating Your Home
- ANZ: Home Rennos
- Suncorp: Renovating from Equity
3. Time to Crunch the Numbers
Now it’s time to show you how to crunch the numbers.
Specifically, I’m going to share six strategies that can make your renovation dreams a reality.
Decide on the scope of your renovation
As explained in Chapter 1, determining the type of improvements you’re going to be making will have a considerable impact on the cost.
When I added two rooms to my current home, my wife and I wrote out a list of must-haves and nice-to-haves together.
This process was a crucial part of making sure that we could afford the renovations and helped us map out every detail; from how much storage, space and even power points each room had.
We had to prioritise.
Budget calculators will become your best friend
Jump online and use one of the many budget calculators to help you get intimate with the costs of your renovation.
If you’re new to all of this (like I was when I renovated my first home on the Gold Coast), what we wanted to do in comparison to our budget was way out.
So be realistic about what you can afford because blowing your budget isn’t on the agenda today!
Break it down now (we’re talking costs, not dance moves)
I mean every little thing.
From the cost of building materials to the cost of every washer and bolt, you’ll need. If you do this, there’ll be fewer surprises to come.
The best thing I did was sit down and have a chat with my friend who’s an architect, and she helped manage my expectations and gave me a few hacks to help maximise the space I had available.
Get a professional eye over it
This is key.
They’re professionals for a reason, so don’t go ahead without the tick of approval.
Get your plans for your renovation reviewed before you finalise your budget so that you can ensure you haven’t missed anything.
Costs include anything from the materials you’re going to use, who you’re going to employ, the quality of finishes and fittings, and the size of the job.
Three is the magic number (when it comes to quotes)
Don’t walk away without getting three separate quotes from every trade. That includes builders and any tradespeople you’ll engage with.
Because the quotes will vary massively, and you’ll thank yourself in the long run.
Chat to family and friends to see if they’ve got any connections or have had good experiences with tradespeople in the past and start there.
Always leave a buffer
I’m talking 10 to 20% on top of your final budget, so you’ve got a contingency plan in place.
Overspending is so easy to do, so ‘beer budget’ in mind so that you don’t miscalculate.
If you need a place to start, check out Your Home, which is a government site that goes through the process of renovating a home.
4. Renovating on a Budget
According to Houzz, the average homeowner spent around $15,000 on renovations in 2017.
So yes: It is possible to renovate on a budget.
The question is:
How can you renovate on a budget while still being able to make all the changes that you want?
Well, that’s what this chapter is all about.
How you can renovate on a budget
So: how can you create a dream space in your tatty old home, all on a budget?
First, pay professionals for essential jobs.
This includes all electrical, plumbing and structural work.
Get at least three quotes, and just because something is cheaper, it doesn’t mean that it’s the best option for you.
Speak to previous clients to get testimonials and make sure that your money will be well spent.
Next, if you’ve got some odd jobs, why not throw a working bee partying? Your network around you can help, and in return, you provide the drinks and a BBQ. There are heaps of jobs you can smash out together like:
- ✅ Painting
- ✅ Fencing
- ✅ Polishing floorboards
- ✅ Tiling
- ✅ Landscaping
Make the most of YouTube and DIY lessons
Check out your local hardware store; often, they have lessons and workshops for the community to engage in to learn how to use tools and get design ideas.
And of course, YouTube is your best friend.
The amount of information that is online is scary, so get lost in the world of DIY.
When it comes to buying materials, make sure you shop around
Go to auctions and discount stores to try and save on supplies and materials. Also, ask for trade prices or see if there are any discontinued sales.
Particular renovations will lead to massive savings in the future, like energy efficient technology. So consider these. I’m talking…
- ✅ LED lights
- ✅ Good quality insulation (to keep cool from Queensland’s sun)
- ✅ Rainwater tanks (you’ll be thankful if a drought comes)
- ✅ Solar panels (say goodbye to Origin Energy bills)
Finally, get creative…
My wife is a stickler for some nice mood lighting, and you’d be surprised how much a room is changed when the right lighting is installed.
Also think of making minor changes like swapping out baths and basins, or giving the place a new lick of paint.
Head over to a showroom or paint shop to get some expert ideas on how to clean up your home’s appearance on a low, low budget.
Finally, distinguish what’s nice to have, and what you can’t live without.
Just like my wife and I did when we were renovating, write out a list and figure out where to draw a line in the sand.
5. Advanced Tips and Renovation Loan Best Practices
Time to cover some advanced tips, and renovation best practices.
We’re not talking the basics.
So let’s dive right in.
The Personal Loan 1-2 step
When I did renovations on my place, I wanted to try to save some money and not get a builder involved.
So I tried being a bit dodgy and using combination of a personal loan and credit card to do the renovations.
What I did was get a personal loan for $30,000 used some of my savings, and credit card to do the renovations on this place which I bought for $425,000.
Once I had finished the renovations, I got the bank to do a new valuation.
And lucky for me, the value of the property had increased to $500,000!
So I was able to increase my loan, and pay out the personal loan.
But a word of warning:
If you are unable to do this, you can be stuck with a personal loan and be paying much higher interest rates than your home loan.
Worse still you could be stuck with these expenses on your credit card paying 21%!
6. Now it’s your turn
I hope you enjoyed my guide to Renovation Loans.
Now I want to turn it over to you: Which of these tips from today’s guide are you going to try first?
Are you going to try cosmetic renovations or maybe a DIY class at your local hardware store?
Let me know by leaving a quick comment below right now.