Home Renovation Finance No Longer A Dampner

Glenn Maynard, Director of The Mortgage Store, recommends two easy ways to obtain home renovation finance depending on the extent of the renovations and the amount of finance required.

"An uncomplicated way to finance home renovations is to extend an existing home loan by attaching a line-of-credit.  This is ideal for minor renovations, such as a new kitchen or bathroom, because a line-of-credit is the simplest form of renovation finance for the borrower to manage."

Lenders typically limit a line of credit for home renovations to approximately $50,000.  This is because larger amounts usually means significant structural changes are being made to the property that will effect the value of the property and therefore the lenderís security.

To obtain a line-of-credit for home renovations, homeowners must have sufficient equity in their existing property to borrow the extra funds. However for more extensive renovations or if there is insufficient equity in the property for a loan increase, a renovation or construction loan is the answer.

For minor house renovations a line-of-credit is preferable to a construction loan because it requires less administration. Most lines-of-credit offer cheque books for easy payment to the builder and only requires payment of interest on the amount of money drawn from the facility.

"Renovation or construction loans are a better finance option when a large amount of money is required for adding that second storey extension or completely renovating a property," says Mr Maynard.

Typically a renovation or construction loan is an interest-only variable loan throughout the home renovation period during which the lender charges interest on the amount drawn at any one time.
 
For instance, renovations of $100,000 may be paid in four drawdowns of $25,000 with the borrower only paying interest on each $25,000 as it is required. After the final drawdown the loan is transferred to a normal home loan product, that is fixed or variable, interest only or principal and interest.

Borrowers need to be aware however that there is more time and paperwork involved in obtaining financial approval for larger home renovations than minor ones.

When applying for a renovation or construction loan, a lender will value the property on the completed value.  This, along with an ability to repay the loan, determines the amount the lender is prepared to lend. Borrowers are required to provide the lender with council approved-plans, builders quote or tender, and a copy of the builder's construction insurance as well as other loan documentation.

The lender may also ask for valuations at each stage prior to drawing down funds for the progress payments, with the additional valuation costs generally charged back to the borrower.  In addition borrowers may need to submit invoices to the lender and complete other payment paperwork.

Going through the process of arranging a line of credit or a renovation loan is the ideal time to re-assess the competitiveness of a current home loan.

"Both a line-of-credit and a renovation loan normally require the completion of a full loan application. Home owners applying for renovation finance should also consider refinancing their existing loan because it is easier for the borrower to do everything at once and may also result in significant savings from lower interest rate charges," says Mr Maynard.

Our Australia-wide specialists are here to help you arrange renovation finance.

KB:     Q0007
Last Updated:     26 Sep 2006

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