Finance for renovation; Property Finance Made Simple www.propertyfinancemadesimple.net.au
Ever wanted to know what is required from a finance perspective to renovate a property, structurally or non-structurally?
Firstly, obtain quotes, understand all costs involved from materials, labour, perhaps cost of accomodation if you need to move out temporarily. Any permissions needed, so if you have a body corporate, seek their permission or if it is structural you will need to talk with council.
Once you understand the cost, you need to determine if it will add the equivalent value to your house or more value, or whether it will over capitalise for what it is and where it is. The more you personalise the renovation, the more risky it becomes of over capitalising. Time heals all wounds, so if you go crazy with over the top renovations then just hold the property long enough and it will balance out. This approach may be ok for some, but it lacks commercial mindedness, so only emotionally charged owner occupiers would do this.
The purpose of the renovation is important, decide if you will enjoy it, or if you are just trying to make money. Finance options include; using any redraw in an offset account, or monies in a line of credit you have already established. If this is not already set up, you will need to understand how much accessible equity you have in your property, then you could apply to set this up with your existing lender or set it up by refinancing to a different lender.
Before making a decision, I recommend engaging a mortgage broker, DO NOT TRUST A BANK. Use a broker, use the opportunity to carry out a finance health check, do you have the best rate and best structure? You may be best refinancing instead of applying for a loan increase/ equity release. Some people use credit cards, this is fraught with danger and is actually quite stupid. Why pay 20% interest rate on a card when you could pay under 4% with a mortgage.
There are of course interest free cards around but I prefer to avoid the headache of continually sweeping those cards to another interest free card, then another, as it’s a hassle and it can cause problems for your credit worthiness in the future with too many credit enquiries as well. You don’t want to look like a debt junky! A personal loan can be considered naturally, the term would be usually 2-7 years and the interest rate around 8-9%, the benefit is it is paid off over a shorter term, rather than 30 years like a mortgage.
So it could potentially cost you less on the surface of it, but will cost you dearly when you look at things more closely, and a good mortgage broker will advise against a personal loan for 3 reasons.
1. It will have greater negative impact on your capacity to borrow money on ANY lenders borrowing capacity calculator, because repayments are higher than a mortgage, as they are over 2-7 years, and the interest rate is more than double that of a home loan.
2. A good broker could look to set up a loan split for the same amount, tell you what the repayments would have been on a persona loan, as if you had taken out a personal loan, then you can make the equivalent repayments against that mortgage split but at a rate of 3.99% perhaps instead of 9%, and pay it off in the same time as a personal loan, without negatively impacting on your borrowing capacity or credit file as much as you would with a personal loan.
3. Less of a negative impact on a lenders borrowing capacity calculator.
For structural renovations, you will require a fixed price building contract from an unrelated builder. Conclusion: use a broker, consider obtaining money by way of a mortgage rather than a personal loan or credit card.
Do not shop around for debt yourself, it will harm your credibility in a lenders eyes, if you incur several credit enquiries on your credit file. Do not go direct to a lender, as that lender may not be the best fit, best rate, best calculator for you.
I talked about these things on Sky tv Channel on the Sky Realestate program on Saturday morning.
I also mentioned my new best seller; Property Finance Made Simple. www.propertyfinancemadesimple.net.au
My book covers much of the above and a whole lot more, and is available in all good book stores.