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Refinancing to renovate
April 13, 2017
Many homeowners put off renovating their property until they have enough savings to foot the bill. What a lot of them don’t know is that they could realise their reno dreams much sooner—simply by refinancing their existing mortgage.
A recent survey by Westpac* found that 39 per cent of all homeowners did not realise refinancing was a potential way to fund their renovation project.
While 67 per cent of Empty Nesters know that they can tap into their equity to make home improvements, just 49 per cent of Gen Y homeowners are aware of this potential reno goldmine—which is surprising when you consider that this age group are likely to need to renovate to accommodate their growing families.
How do you refinance to renovate?
The procedure to refinance is not too dissimilar to taking out your original mortgage, so if you’ve been dreaming of a second bathroom or an outdoor entertaining area that will wow your guests, here’s what you need to know.
To get the ball rolling on a fabulous home makeover, start by asking yourself the following questions:
1. How much do I need? Consider how much your proposed renovation is likely to cost, so you know how much you’ll need to borrow. Seek out some quotes from tradespeople and don’t forget to include any fees for planning permits you may require, as well as a contingency fund—most experienced renovators suggest you have access to a kitty of 10 percent of your reno budget for ‘just in case’.
2. What is my home worth, and how much equity do I have? You’ll need to be in a strong equity position (i.e. owe a fair bit less than your home is worth) in order to free up those renovation dollars, so before you start measuring up your rooms, it’s a good idea to organise an independent valuation to assess your home’s current market worth. If you don’t want to shell out for a formal valuation, ask a few local real estate agents for an appraisal so you have a rough idea of value before approaching your lender.
The property’s value in the current market will determine how much you’re able to borrow. Note that the lender may take a more conservative view of the property’s worth, which will impact how much they are prepared to loan you, and that you generally want to keep your loan to value ratio (LVR) below 80%, or you’ll pay lenders mortgage insurance fees.
Current mortgage – $423,000
Current property value – $650,000
Loan to value ratio at 80% – $520,000
Difference: current loan and 80% LVR ($520,000 – $423,000) = $97,000
In this example, you may have access to up to $97,000 to renovate your home. After renovation, your property will likely be worth even more than $650,000, increasing your equity position once more.
3. How much can I afford to repay? Now would be a good time to take a glance over your household budget, to determine how the repayments on a new loan will fit into your current expenditure. Is it essential that you keep your monthly costs down, or do you have some wiggle room? Your monthly payments will increase as you will owe the lender a larger sum, unless you decide to refinance to a new bank altogether and therefore begin a brand new 30-year loan term. It may be worth talking to a mortgage broker to discuss your options and run through the potential fees involved during the refinancing process
After running this process, all that’s left to do is to apply for the loan! It really is such a simple process that there’s no need to put off that much-need kitchen upgrade, or keep the kids cramped in their shared bedroom. By refinancing your mortgage to renovate, you could be enjoying living in your dream home much sooner than you had thought was possible.
Source: *2015 Westpac Home Ownership Report