Funding your renovation to create wealth

Add value

Before you start working through the finances, make sure you’re clear on how much value is being added to your property.

Most renovations should add more value to your home than they will cost to carry out, but if you’re going to go through the process and risk of adding to your home, you want to make sure you’re getting the absolute best outcome.

Do an honest appraisal of the strengths and weaknesses of your home, then consider how the money you spend on a renovation will increase the value of your property. If you’re renovating to sell or increase rental yields, look at the local area and see what features are creating the greatest demand. A small amount of research now can pay off big down the track.

If you’re renovating for the joy of having the property you’ve always wanted, still consider how to invest your funds wisely and focus on adding value. Set a realistic budget based on your home’s market value and what you expect to gain from the renovations, as this will help you decide what’s important and which financing setup will best help achieve your goals.

Release equity

One of the best ways to grow your wealth is to better use the assets you already have. Accessing the existing equity in your home – the difference between your home loan balance and value of your property – is one of the most common ways homeowners borrow money when they want to renovate.

Using equity involves borrowing against the current value of your home, before any value-adding renovations have been made. In most cases you’ll be able to obtain the funds upfront. How much you’ll be able to get will vary, depending on the lender but a good rule of thumb is 80% of the value.

If you have a mortgage on your home, the amount you can borrow is usually the difference between the balance of the loan and 80% of the value of the property. If you own your home outright, you can usually borrow up to 80% of the home’s total value.

If you’ve built a comfortable level of equity in your home, this is a great option. However, there are still risks associated. If the costs of the renovations exceed your available equity, you’ll still need to make up the difference. If you run out of funds mid-construction and the property is not in sound, lock up condition, you may have other issues like not being able to obtain extra funds down the track.

Construction loan

If you plan for more than a few subtle tweaks and want a full transformation of your property, you might want to consider a construction loan. A construction loan usually gives you access to money progressively as you complete different stages of the renovation, linked to a fixed price building contract you will have with your builder. These ‘progress payments’ allow you to break down the big project into smaller milestones, giving you the freedom to design and build out the property with assurances at every stage.

With a construction loan, the lender will use the building plans to assess the value your home will have after the renovation is complete, giving you capacity to borrow against that value. You may be able to borrow up to 90% of the end value of your home and access mortgage level interest rates, which tend to be lower than other types of financing, like credit card and personal loan rates.

Some construction loans employ Interest Only payments during the construction period, meaning your repayments are lower throughout this time as well. There are some caveats you’ll need to be aware of with construction loans, such as the need for additional insurances and that it will be kept for personal investment or residential purposes.

As always, if you’re unsure, talk to a mortgage expert to help navigate these challenges.

Line of credit

When you need funds with a bit more flexibility, a line of credit may be what you need. While traditional personal loans have a fixed term, a line of credit will allow you to access extra money when you need it. This means access when you want it, without applying for another loan with more flexibility than fixed-term loans.

As with other types of credit and loans featured here, you only pay interest on the funds you use and, as you pay off your balance, you can re-borrow the unused funds without reapplying.

However it’s not free money and definitely not without its risks. Interest rates on this type of product are typically much higher than a construction loan or equity release loan. As with other loans, a line of credit will often charge a number of fees, so you may want to do your research on all the costs before choosing this type of loan.

If the situation gets beyond you and your ability to repay, it can create long-term damage to your wealth creation capabilities.

Personal loan

Personal loans are capped at a specific level, the limit for which will vary by lender. Some lenders may ask for security while others will go ‘unsecured’. These decisions will affect interest rates, which are higher on personal loans than home equity loans.

Payments need to be made over a much shorter time period, usually between one and seven years. There are also a number of fees attached, so make sure you factor these in when making your decision.

A personal loan may be a viable option if you’re only making minor renovations or need a small injection of cash over a short time frame. Getting the best deal on a personal loan can save you thousands in interest and fees so if this sounds right for you, make sure you talk to an expert first.

Credit cards

For the smallest of projects, you may want to consider using credit cards, provided the amount can be cleared within your interest-free period.

However you want to ensure any payment from a credit card for renovations is not treated as a cash advance. Cash advances don’t usually come with interest-free days and interest will likely be charged from the time you withdraw the amount.

Make sure you’re really clear on all the details, the fees and other considerations before you commit to paying for any renovations. If the value is there, you’ll be well on your way to living the lifestyle you’ve always wanted.