Whatever your motivation to renovate may be, it’s not always the case that we have the funds lying around to start alterations to our homes or investment properties.
This is the purpose of renovation loans, a credit form that has been gaining massive popularity in recent years.
Perhaps your current home just needs a renovation? Or maybe you’re a repo house buyer that buys old run down homes and restores them into a thing of beauty, before putting them back on the market to turn at a profit! In both cases renovation loans can come in handy!
What is a renovation loan?
Quite simply it is a business or personal loan that you take out in order to renovate your home or property. Whether it be refinancing your home loan, using an alternative line of credit or otherwise making use of your home equity, renovation loans come in many different forms. The bottom line is that it’ll mean cash in advance to do the work now and repay the loan later.
How much can you borrow?
It’s not as simple as giving a maximum loan amount. There are many answers depending on what you intend to do and your financial capabilities.
If you don’t actually have any intention of renovating, then you can borrow an amount that’s equivalent to anything up to 80% of the property value in the form of a home loan. Should you require minor renovations then you can typically borrow up to 90% of the value of the property.
Bear in mind that if the renovations are cosmetic and you have a builder, then borrowing amounts are 95% of the purchase price plus renovation costs. For major renovations on a property, expect to have allowances of up to 80% of the value of the property. But again, if you have a builder then it’s the same where up to 95% can be borrowed with the cost of renovations.
Finance to tear down & rebuild
If renovating isn’t on the agenda in the typical sense and you’d actually prefer to tear it all down and rebuild, then a renovation loan will still apply, except in this case you will only be allowed to borrow on the value of the land less the cost of tearing down the original building. Anything up to 90% of the land alone will be permitted, or otherwise 95% of the cost of land plus the cost of construction with a builder. If you don’t have a licensed builder, then, unfortunately, you can only borrow up to 60% of the cost of the land and renovations.
A few side notes on borrowing for renovations
Banks will always assess a building on the condition it is in. If the home that you choose to renovate is leasable in its current form and the drainage and taps are all in working order, then normal lending rules apply. Which ideally translates to borrowing up to 100% of the value of the property through a traditional loan, or 80% on a low doc loan.
Why banks avoid renovation loans
Banks aren’t typically fond of renovation loans. You might wonder why, since banks make money from loans, so why the hassle? The problem is that more often than not, renovations end up going pretty pear-shaped a lot of the time.
It’s so important for Australians who wish to renovate to have a licensed builder because if they don’t, the banks are already running for the hills in anticipation of a renovation disaster. It’s too much admin to deal with the hassles that come with amateurs that believe they can do anything with their hands, only to find out they can’t and end up causing havoc.
So, what have you learnt? Get a licensed builder if you even think about approaching the bank for a renovation loan. They come with insurance that covers home warranty and thus reduces the risk for banks. Regardless of these obviously attractive securities with licensed builders, banks prefer the idea of high-quality work being done, renovations not taking too long and the value being assessed much sooner than if the homeowner himself was doing everything.
If I’m ready to renovate, when should I apply for a loan?
One thing is for sure – don’t leave it too late! The sooner the better, because banks don’t get this loan type approved overnight. With high equity, expect a turnaround time of 1 to 2 weeks and with low equity, you can expect to wait up to 6 weeks.
The benefit of this type of loan is that the Australian bank will pay the builder payments in stages of the build if it’s a large renovation job. However, if it’s a small renovation then the builder only gets paid on completion.
Popular renovations in Australia
Structural renovations where you might want to change your nook and cranny Aussie home into a large spacious open plan one are one of the most popular types of renovations.
Home extensions & upgrades
Extensions are popular too! Since we typically move into a home in the younger stages of our lives, we don’t always have the foresight to know that we will need additional rooms. Perhaps a bigger garage, or a second kid’s room, since you only planned on having one, but life simply happened!
Renovating the kitchen or bathroom
It’s the two rooms that most people are fixated on when it comes to fixtures and fittings and will make or break a property. That is why it’s important that you get it right. We often wish to upgrade the built-in oven and hob or change the bath and basin in the bathroom. Since these rooms are typically tiled, people often feel the need to change the colour or style of tile.
Painting & flooring upgrades
Cosmetic changes are among the most common as you can feel as though you entered an entirely new home with simple changes. A fresh coat of paint in a different colour throughout the house, or perhaps changing from carpets to wooden flooring. Any of these changes don’t cost you too many Aussie dollars from your wallet and will leave your home feeling freshly renovated!
Adding a swimming pool
Let’s not forget the summer favourite - a swimming pool! It’s true, we all feel we can live without one if it doesn’t come with the house until summer hits and the kids spend more time at their friends than at home. It’s time to get your own pool and let the neighbors enjoy their own! It might be expensive, but what a great investment, especially if you have kids.