Owning a house is like owning a family. It is one of the most important ambitions in life for any individual, belonging to any strata of social and economic status. The situation is same, whether it is in Australia or anywhere around the globe. An almost equally important scenario is renovating an already existing house. This may be a purchased home or own property, to which you want to give a new look. The significance of house renovation for the people of Australia is very evident from social examples like television shows, for instance, The Block and House Rules.
Now or then Australians may want to rework on their house for aesthetic improvement, for strengthening or for better facilities. The critical factor for planning house renovation is the arrangement of funding. It is always advisable to plan your finance well and accumulate the necessary fund from your own earnings and savings. This way, renovation can be done without creating additional monetary debt in the form of borrowings.
If you do not have enough funding and yet, renovation is essential, the next common option might be to borrow money, so borrow money for Home Renovation. There are various sources to borrow money from, depending on the person, either from another individual or from a financial firm. Lets detail up a few facts about such options from financial forms available for house renovation.
Home Equity Loan
The primary thought in the mind of Australians for creating the house renovation fund will be to approach a financial firm or bank and avail a home equity loan. You can take a home equity loan depending on the value of your home, by pledging it. There is a cap on the maximum amount that could be availed here, and the cap will be smaller in case there are other existing loans such as a housing loan on the same property.
This can be illustrated in figures as follows. If the total value of your house is $500,000, the maximum amount that can be borrowed as any loan will be 80% of the value, without mortgage insurance, that is $400,000. 100% value cannot be claimed from the firm, generally. If you already have a mortgage for the house, then the remaining amount in the 80% value can be obtained as a home equity loan. In the above example, assuming there is a mortgage of $350,000, the remaining $50,000 ($400,000-$350,000) could be borrowed for house renovation.
If you are planning for a small-scale renovation, home equity loan is a good option. For a larger budget renovation involving major structural changes of the house, this may not be sufficient. The next alternative then is to go for a construction loan.
Availing a construction loan for house renovation is more or less the same as a home equity loan, except for the valuation method. Instead of calculating the loan amount based on the existing value of the house, the bank will take into account the budget estimate of the renovation work and calculate the loan amount based on the finished value of the home.
Citing the previous example with the house valued at $500,000, and the budget for house renovation planned at $200,000, the bank will be calculating the total value based on the estimate for completion. This will amount to $700,000 and the bank will approve 80% of that amount which is equal to $560,000. If there is a mortgage of $350,000 already existing, then the balance amount of $210,000 will be the approved amount to be borrowed as the construction loan.
However, the bank has certain terms and conditions while approving a construction loan. The whole sanctioned amount will not be handed over to the borrower upfront. Instead, the loan money will be released in phases based on the progress of renovation. This practice is done to ensure that the money taken as construction loan is completely utilized for the renovation purpose and not being diverted to other activities, resulting in an increase in the value of the house.
If you have already mortgaged your home for housing and construction loans with no equity value remaining, another loan which can be borrowed from banks is personal loan. The amount eligible to be taken as personal loan will be less compared to home loans, and the rates of interest will also be higher with no tax benefits.
So it is better to think about taking personal loan only if you do not have any other funds available giving you lesser repayment burden although it is easier to get approved compared to loan against property.
If you have no other alternative to generate enough funds for the renovation of your home, the remaining option is the highly risky credit card facility. Though it is termed as a facility, it is actually a loan that has to be planned wisely and can otherwise lead to considerable monetary damage. Small renovation funds can be availed via credit card, but repayments should be done on time and temptations for indiscriminate use should be avoided.
Credit cards have the highest interest rates, and their advantages over other methods of borrowing are that they are easily accessible and payments are flexible without any fixed EMI.
How can borrowing be a justifiable option?
As mentioned before, borrowing, no matter which type, is debt and it is never a good method to accumulate debt. You can consider borrowing money for renovations only if you have no other sources of finance and if you are sure that the renovation work will improve the value of your home and give you the desired improvement in your lifestyle.
A welcoming benefit of taking loans for renovation is that you can save some money by reducing income tax. The reduction will be based on a fixed percentage of the interest and principle which you spend for repaying the loan. This benefit is available only for loans mortgaging your house.
Before finalizing the decision to avail any kind loan or borrowing, make sure you have the capacity to make timely repayment without affecting your standard of living.