Every homeowner considers renovating at some point, from a major extension to a coat of paint. But it costs to do a makeover.
To DIY you need tools and equipment and to call in a professional means paying an invoice.
Like all financial questions, how much is too much comes down to the benefit you get in lifestyle or potential resale value compared to the outlay, and the hardest part is paying the bills.
Avoid the debt trap
Most people spend everything they earn on a monthly basis.
So it appears the only way to pay for anything is by accruing debt.
Assuming you have enough equity in your property and a reasonable capacity to repay, banks are more than happy to sign you up, even in this supposed climate of restraint.
Depending on the scale of the reno you might be forced into a construction loan at a higher interest rate with the option of rolling it into your mortgage when the bank is convinced you’ve added enough value to their security.
Some seeking a loan think that paying a mortgage broker will get them the cheapest interest rate, because that’s how mortgage brokers convince you to sign with them rather than the banks.
Getting what you want
So how do you pay for the reno you want?
It depends how you look at debt. It’s obvious you can spend more in a lifetime if you limit the interest you pay, so it’s important to relate to debt better.
This difference in perspective is the largest single thing that separates the independently wealthy from those who retire on only an age pension.
Most mortgages are designed to keep you in debt, especially those with offset accounts or lines of credit. As with credit cards it’s too easy to view the bank’s money as your own.
There is no perfect solution but the best approach is to look at debt differently. Rather than consolidating it, which is what banks and mortgage brokers say to do, approach it in bite-sized chunks instead.
Consider interest rates
In the worst-case scenario homeowners pay tradies using a credit card as a quick-fix solution.
For small-scale renos it’s unlikely refinancing the mortgage makes economic sense because of the fees.
But the interest on a credit card is at least twice that of the average mortgage.
If you’re tempted to put the revamp on the card then you can’t afford it.
The only sure way of saving interest is to avoid debt.
Having said that, for large-scale renovations debt can be used as a tool to make the unaffordable attainable.