Renovating your home is a great way to enhance its every day look and feel and of course, improve the sale price when you decide to move on. In fact, according to research by Houzz, spending on kitchen renovations jumped 16% to 26% in 2019 over the previous year; followed by living rooms (23%) and bedrooms (17%)
Even though renos are all the rage (it seems like an Aussie national sport at this point), financing them often a thorny issue. How can you finance a renovation without going overboard?
Set a budget – what are you renovating and why?
This is the first question you need to answer What really needs renovation? According to the Houzz research, the median renovation spend for three rooms was about $20,000 in 2019. Every home is different and has different needs. That said, the best guide to how much you should spend on a simple renovation is no more than 10% of the home’s value.
If your kitchen looks relatively modern but the bathroom is pink, unsightly, and mouldy, one is in desperate need of a makeover than the other. In most cases, you won’t need a total bathroom renovation – what’s known as a partial renovation – where the fixtures and vanities etc. are replaced but the layout remains intact – can cost significantly less yet produce great results.
Often, modernising your place can enhance its value. Replacing CFL/incandescent lights with LED downlights, replacing old curtains, re-painting rooms – these are cost-effective ways to give a place a new lease of life.
Use a personal loan – not your equity
Using the equity saved up in your home seems like the most obvious choice to fund your renovation. However, this makes little financial sense. Some homeowners treat their equity like a “bottomless pit” and go for renovations that really do end up breaking the bank.
Savvy Managing Director and personal finance expert Bill Tsouvalas says using equity can cost more over time than using an equivalent unsecured personal loan. “Using home equity as your own personal line of credit will heap on more interest over time. Though the interest rate is a tiny number compared with personal loans, you will add more years to the loan which means much more interest.”
If you take out more than 80% of your loan-to-value ratio, you’ll also be on the hook for Lender’s Mortgage Insurance, which can cost thousands.
Don’t flip-flop
Once you have designs on your renovation, don’t change your mind half-way through. This can contribute to as much as blowing out your budget by 50% through waste, delays, and paying premiums for subbies to come over out of hours.
Doing the maths
Let’s say you have a $800,000 loan with an interest rate of 2.45%p.a. for 25 years. Interest including fees of $10/mo. will end up being $273,647. Let’s use the $20,000 median for the total price of the renovation. The interest would balloon out to $292,641 if you wanted to pay the same amount in repayments each month. An equivalent personal loan at 8% p.a. will only cost you $4,932 in interest. Compared with $18,994 with the mortgage, that’s almost a whole other renovation spent just in interest!
Remember, this is only a guide and not a substitute for financial advice. Consult your accountant or financial adviser before making any major financial decisions.
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