I often hear both potential clients and clients alike complaining that they want to renovate because they just don’t quite have enough space in their current homes. They often think they can’t do it because they don’t have any spare cash in the bank to pay for the renovation or they don’t know how to finance a home renovation without savings.

Well, the truth is… that you can make a renovation happen without any savings in the bank.

Ways to finance your non-structural home renovation without savings

If you are planning a cosmetic renovation that doesn’t involve structural works you won’t need a construction loan. You could potentially fund your renovation using one or more of the options below.

1. Use the redraw facility of your current home loan

Finance your renovation project with the redraw facility of your variable rate home loan. Some fixed-rate loans also offer a redraw facility.

By utilising this feature, you can access any extra payments you have made towards your loan to pay for renovations without needing to take out a separate loan or increase your mortgage. This can be a convenient and cost-effective way to fund your home improvements, especially if you have already been making additional repayments on your loan. Instead of applying for a new loan or increasing your existing one, you can simply dip into the funds you have already paid off to finance your renovation project. This can save you time and money in the long run, making your renovation goals more achievable without putting a strain on your finances.

Here are the pros and cons of using a redraw facility to fund a home renovation:

Pros:

• Convenient access: Redraw allows homeowners to access any extra repayments they’ve made on their home loan, providing convenient access to funds without needing to apply for a new loan.
• Lower interest rates: Home loan interest rates are typically lower than other forms of credit, such as personal loans or credit cards, potentially resulting in lower overall costs.
• No enquiry left on your credit report: Since you are just using the extra repayments in your existing loan and not applying for a new loan a credit check won’t be completed by the lender.

Cons:

• Reduction in equity: Redrawing funds from the home loan reduces the equity in the property, potentially affecting the ability to access future finance or impacting the sale proceeds if the property is sold.
• Extended loan term: Redrawing funds can extend the time it takes to pay off your home loan, resulting in higher interest payments over time.

 2. Borrow against the equity in your home

Say you bought your home for about $400,000 5 years ago and you borrowed $360,000 at that time. If you have been making the minimum repayment your loan would have been reduced to around $334,500.

Let’s say your property is now valued at $600,000.

That means that you can borrow up to $480,000 (80% of the current property value) without paying a lender’s mortgage insurance premium. This would require topping up your home loan to $480,000.

This will give you access to $145,500 ($480,000 less your current loan balance of $334,500). If this is enough the renovation is paid for without any savings.

Here are the pros and cons of borrowing against the equity in the home to finance a renovation:

Pros:

• Access to a larger sum: Borrowing against the equity in the home allows homeowners to access a larger sum of money compared to using a redraw facility, potentially covering the full cost of the renovation.
• No additional debt accounts: Like using redraw, borrowing against equity involves utilising an existing debt via a loan increase rather than taking on new debt accounts, which can simplify financial management.
• Potentially lower interest rates: Home equity loans often come with lower interest rates compared to other forms of credit, such as personal loans or credit cards, resulting in lower overall borrowing costs.

Cons:

• Increased debt burden: Borrowing against equity increases the overall debt burden on the property, potentially leading to higher monthly repayments and extending the time it will take to pay off the loan.
• Potential impact on future borrowing capacity: Increasing the loan amount and reducing equity in the property may affect the ability to access future finance or refinance the loan in the future.

3. Refinance your existing home loan to another lender

Thinking about refinancing your home loan? It could be a smart move if you want to pay for a renovation or if you want a better interest rate on your loan. By switching to another lender, you may be able to obtain a lower interest rate to minimise your loan repayments as well as complete your home improvements.

When considering refinancing, it’s important to take into account the equity in your property. This will help determine the loan amount you can borrow. The equity in your home is determined by the value of your home and your loan balance.

We are generally able to order a valuation for your property from most lenders before we lodge a loan application to them. This means you know how much equity you have in your home before we lodge the application.

Pros:

• Access to increased funds: Refinancing with a new lender may allow homeowners to borrow extra money, leveraging the increased value of their property to cover the renovation costs.
• Potentially lower interest rates: Switching to a new lender could result in lower interest rates, minimising home loan repayments and overall borrowing costs.
• Improved loan terms: Refinancing provides an opportunity to negotiate more favourable loan terms, such as a longer loan term or additional features, enhancing financial flexibility.
• Consolidation of debts: Refinancing can also be used to consolidate other debts, such as personal loans or credit card debt, into the mortgage, potentially lowering overall interest rates and simplifying debt management.

Cons:

• Costs associated with refinancing: Refinancing typically involves fees and charges, such as discharge fees, application fees, valuation fees, and government registration fees, which can add to the overall cost of the renovation.
• Potential for higher loan amounts: While refinancing can provide access to additional funds, it also increases the overall loan amount and debt burden on the property, potentially extending the loan term and increasing interest payments over time.
• Impact on credit score: Applying for a new loan will result in an enquiry left on your credit report which can lower your credit score.

4. Use a personal loan

A personal loan may be a suitable option for funding home renovations when a homeowner lacks sufficient equity in their property to borrow the required amount through a home loan. Home equity, the difference between the value of your property and the amount owed on your mortgage, determines the borrowing capacity against the property. When the equity is not substantial enough to cover the renovation costs, a personal loan becomes an alternative solution.

Additionally, personal loans often have more straightforward application processes and quicker approval times compared to home loans, making them appealing for urgent renovation projects.

Pros:

• Accessibility: Personal loans are often easier to qualify for compared to home loans, making them accessible to a wide range of borrowers.
• No security required: Personal loans typically do not require collateral, meaning homeowners do not have to use their property or other assets as security.
• Quick access to funds: Personal loans typically have shorter approval times compared to home equity loans or refinancing options, providing quick access to funds for urgent renovation projects.

Cons:

• Higher interest rates: Personal loans generally come with higher interest rates compared to home loans or mortgage refinancing, resulting in higher borrowing costs over time.
• Limited loan amounts: Personal loans typically have lower borrowing limits compared to home equity loans, which may not fully cover the cost of extensive renovations. Generally, most lenders will limit personal loans to approximately $50,000.
• Shorter repayment terms: Personal loans often come with shorter loan terms, resulting in higher monthly repayments compared to home loans. The maximum loan term for a personal loan is generally 5 to 7 years compared to 30 years for a home loan.
• Potential impact on credit score: Taking out a personal loan can impact the borrower’s credit score, especially if multiple loans are taken out within a short period.

5. Apply for a credit card

Credit cards may serve as a viable option for financing home renovations in situations where homeowners find themselves lacking sufficient equity in their property to secure a traditional home loan. When exploring ways to finance a renovation, especially for smaller-scale projects or immediate needs, credit cards offer a convenient and accessible solution.

One of the primary advantages of using a credit card for home renovations is the ease and speed of access to funds. Homeowners can use their existing credit card or apply for a new one with a higher credit limit to cover renovation expenses swiftly. Additionally, credit cards often come with promotional offers, such as zero-interest introductory periods, which can provide temporary relief from interest charges, especially for short-term borrowing needs.

Furthermore, credit cards offer flexibility in managing renovation expenses, allowing homeowners to make purchases as needed and repay the balance over time.

However, it’s crucial to weigh the benefits against the potential drawbacks when considering credit cards as a financing option for home renovations. Credit cards typically carry higher interest rates compared to other forms of financing, making them less cost-effective for long-term borrowing. Additionally, relying heavily on credit cards for renovations can lead to accumulating high levels of debt and potential strain on household finances if not managed responsibly.

Pros:

• Convenience: Credit cards offer a convenient way to access funds for renovations, allowing homeowners to make purchases and payments quickly and easily.
• Flexible repayment options: Credit cards provide repayment flexibility, allowing homeowners to pay off the renovation expenses over time, according to their budget and financial situation.
• Rewards and benefits: Many credit cards offer rewards programs, cashback incentives, or other perks for spending, providing potential savings or benefits for renovation expenses.
• Immediate access to funds: With a credit card, homeowners can access funds instantly, enabling them to address urgent renovation needs or unexpected expenses promptly.

Cons:

• Higher interest rates: Credit cards often come with higher interest rates compared to other forms of financing, resulting in higher borrowing costs, especially if the balance is not paid off in full each month.
• Potential for debt accumulation: Relying on credit cards to fund renovations can lead to the accumulation of high-interest debt, potentially straining household finances if not managed responsibly.
• Credit score impact: Credit card applications can negatively impact credit scores, potentially affecting future borrowing ability.
• Limited borrowing capacity: Credit card limits may not be sufficient to cover large-scale renovation projects, limiting the ability to finance extensive home improvements.

How to finance your structural renovation

If you are extending a home, including adding a second storey, this is considered a structural renovation. Lenders require a progressively drawn construction loan to be used when a structural renovation is completed.

This type of renovation generally requires plans to be drawn up and council approval. Lenders will require a licensed builder to be used and a fixed-price building contract is required.

In this case, an ‘on completion’ valuation will be completed. This is where the valuer determines what your home will be worth after the renovation is finished.

The advantage of this is you can borrow against the predicted value of the property after the construction is completed. No doubt adding extra rooms or a granny flat or a second story will increase the value.

Let’s say your home is currently worth $500,000 and you have a $200,000 fixed price building contract. If the valuer estimates the completed value of the renovated home is $700,000 the lender will lend against $700,000 instead of $500,000. This means that you can borrow up to $560,000 (80%) without incurring lenders’ mortgage insurance. If they were to lend against the current value of $500,000 the maximum loan amount without lenders mortgage insurance would be $400,000, which is $160,000 less.

When it comes to construction loans lenders release the borrowed funds in stages and pay the builder directly. There are generally 5 to 6 payment stages in a building contract.

Pros:

• Interest-only payments: During the construction phase, borrowers may only be required to make interest payments on the amount drawn from the loan, potentially reducing financial strain during the renovation process.
• Access to funds as needed: Construction loans typically provide access to funds in stages as the renovation progresses, meaning you aren’t paying interest on the entire approved loan amount until it is fully drawn.

Cons:

• Lack of control over payments: Lenders control the payments on construction loans. Payments are not always made to the builder in a timely fashion and the lender may send a valuer to inspect the property before making some payments.
• Additional fees and charges: Construction loans may involve additional fees and charges, such as inspection fees, draw fees, and closing costs, which can add to the overall cost of the renovation project.

This sort of creative thinking allows you to get the home of your dreams sooner. If it is time to renovate, then it’s time to call 1300 661 211 or enquire online at https://www.mortgageworldaustralia.com.au/contact-us/ and we will explore how we can make your dream renovation happen.