When space is an issue or your family has grown, but you love where you live and don’t want to leave the neighbourhood, an extension could be the answer. However, whether you decide to add another storey or sprawl out into the backyard, this will cost serious money. So, your options are to borrow or use your savings. Most Australians spend all their hard-earned cash before the month is out, and few even have savings accounts, so borrowing seems to be the only option(1).

Twenty-seven percent of homeowners refinance(2) their mortgage for significant improvements like renovations, a ground floor extension(3) or adding a second storey. However, according to a survey of over 1,000 homeowners, about three in four saw it as a challenge to refinance. While it would increase your mortgage, any renovations may also add to your home’s value. Below you’ll find a closer look at the options available for refinancing for home improvements.

Although it wouldn’t be advisable, some homeowners who only need a minor renovation will pay the builder using their credit card because the cost wouldn’t call for a whole new loan. But credit card interest rates are usually whopping, so this route doesn’t make sense. If you want lower interest rates but would have to resort to the card, it merely means you can’t afford the project.

If you have enough equity, and providing you can afford to service a loan, your bank will probably be more than pleased to offer you a renovation loan or some other type of refinancing, even though people say the banks are tightening up their lending practices. The following kinds of loans (not in order of preference) may help you decide:

• Construction loans
  For a major extension or renovation you might be offered a construction loan with funds drawn down to pay your builder for each stage of the project, so you pay interest only on the amount you spend. The funds will just be drawn down to a builder who is registered and insured and with whom you have a contract.
• Home equity loans
  If you’ve been paying off a mortgage for a long time, your property’s value has probably risen, and your mortgage would have reduced so you could be eligible for a home equity loan. Equity loans depend on how much your property is worth and how much you still owe to the bank. You can borrow a portion of the difference between the two, which is called equity. It means you will have a bigger mortgage and will have higher repayments and possibly a different interest rate.
• Lines of credit
  Lines of credit are like credit cards but with lower interest than most cards and they’re secured with a mortgage against your home, allowing you to take out money up to a set limit at any time. Repayments are usually monthly as with a mortgage.
• Personal loans
  If you need a bit more cash to finish a renovation project or extension or if the job is only a minor one, a personal loan might be a good option because the usually high-interest rate is fixed, so you know exactly how much you need to pay and when it will be paid off. So, there are no higher interest rate surprises halfway through the term of the loan.
• Redraw Facilities
  You might be able to draw on funds you’ve paid if you are ahead on your mortgage repayments, providing your loan has a redraw facility.
• Refinancing
  Your bank might approve an entirely new loan if your present one doesn’t have a redraw facility. You can do with either with your lender or choose another financial institution.

Reference Articles

1. http://www.handyman.net.au/how-finance-your-renovation
2. https://www.finder.com.au/refinancing-to-renovate
3. https://propertyupdate.com.au/finance-property-renovation