How to Finance Your Home Renovation?
Are you wondering how to finance home renovations? If so, you’re certainly not alone. Australia is undoubtedly a nation of renovators, with almost 62% of homeowners completing some form of renovation in just 12 months during 2015/2016. And this love affair with renovating has only increased since then. According to data from the Australian Bureau of Statistics (ABS), renovation expenditure in 2019 averaged about $680 million per month. Fast forward to 2021, and as a nation, we’re now spending around $1 billion per month on renovations! So, it’s no wonder demand for home renovation loans has increased.
Why Is There Such High Demand for Home Renovation Loans?
While Australians have always been big on renovating, there’s been a definite home improvement boom in the last year or two. This is perhaps not what most people expected when they first heard we were dealing with a global pandemic. So, why has COVID led to so many home improvement loans in Australia?
First of all, the majority of Australians were unable to travel during 2020 and 2021. So, all the money that usually would be spent on holidays overseas was instead going into savings. There was also a significant change in usual household expenditure in parts of the country where lockdowns closed theatres, restaurants and cafes. As a result, the Australian household savings ratio hit a high of 22.1% in June 2020 (the highest it had been since 1959). All of a sudden, that long-awaited renovation seemed more attainable.
Another major factor that drove renovation financing in 2020/2021 was the transition for many Australians towards working from home. For some, this led to a tree- or sea-change, as the commute to the office was no longer a big deal. For others, it meant looking at the home environment with a fresh and critical eye. When coupled with the government HomeBuilder incentive program, it’s perhaps not surprising that Australians spent almost 25% more on building and hardware supplies than they did pre-COVID. And there’s no sign that this renovation boom is going to slow down any time soon. The Housing Industry Association (HIA) predicted that significant home renovation spending will continue throughout 2021 and 2022.
How Much is the Average Renovation Loan?
A renovation loan will vary significantly depending on the level of savings a person has and their proposed scope of works. For example, if you’re planning a fairly modest bathroom upgrade, then your renovation loan will be quite different to someone contemplating a major extension. That’s why it’s always a good idea to talk to an experienced mortgage broker before you decide on a particular method of renovation financing – the right home improvement loan for you may be quite different to what would suit someone else.
So, how much does the average renovation in Australia cost? In 2015, the average total for a home renovation was $68,300. This same survey found that kitchens and living areas were the spaces most likely to be renovated. However, the more recent HIA Renovations Roundup report showed that 1 in 2 renovations in Australia cost somewhere between $40,000 and $300,000! This represents a significant financial cost for the average family, so it’s no wonder people are searching for ways to finance home renovations.
How Much is the Average Home Improvement Loan for a Specific Area?
What about when it comes to renovating a specific area of the home? While costs will always vary depending on the size of the space, your choice of finishes and the level of work involved, a Hipages study found the following average costs for home renovations in Australia:
- Kitchens: Renovating a kitchen cost between $10,000 and $45,000.
- Bathrooms: Renovating a bathroom cost between $10,000 and $35,00 (the costs increased when tiles needed to be removed and replaced).
- Living Rooms: Renovating a living room cost between $10,000 and $15,000, making it one of the more affordable areas in a home to renovate. However, when homeowners chose to replace the flooring, the cost was generally more than $15,000.
- Bedrooms: Renovating a bedroom cost between $2,000 (for a fresh coat of paint or new carpet) and $35,000 (for the addition of an ensuite bathroom).
The Different Ways to Finance Home Renovations
Considering the cost involved, you may need to start your project by investigating the various options for home renovation loans and how they work. There are several different solutions available for financing your home renovation, from loan top-ups to refinancing and specialised construction loans. An experienced finance broker will explain the different home improvement loans available to you and answer any questions you may have. They’ll also research the various lender deals and make an expert suggestion on which option would be most suitable for your specific circumstances.
How to Finance Home Renovations in Queensland
Financing your planned construction project could be achieved using one of the following 6 home renovation loan options:
1. Ask for a home loan top-up
Some mortgage lenders will allow you to borrow an added sum of money without having to refinance or take out another loan. Often referred to as a home loan top-up, you’d basically be increasing your total mortgage balance to access cash for your renovation. If this is something that your lender allows, it could be a good solution for your home renovation loan (as you won’t have to switch to a different lender, and you’ll be borrowing with the same low interest rate that you already enjoy on your mortgage).
2. Utilise a redraw facility
If your home loan includes a redraw facility as one of the available features, this could be useful for financing your home renovation. A redraw facility allows you to withdraw any additional repayments that you have made on your home loan. For example, if you’ve had your home loan for 10 years, and you’ve been paying an extra $300 every month throughout that entire time, you would have paid an additional $36,000 off your mortgage. A redraw facility would enable you to withdraw this cash and use it for your renovation.
3. Refinance your existing home loan for renovations
Refinancing an existing home loan is one of the most popular forms of renovation financing, and it’s a great option for homeowners who have built up equity in their property. What is equity? It’s the difference between what your property is worth and the balance of what you owe on your mortgage. For example, if your property is worth $500,000 and your home loan balance is $265,000, you have $235,000 worth of equity. Refinancing would allow you to increase the total balance of your mortgage and obtain the cash necessary for your home renovation loan. A refinance mortgage broker will be able to advise how much of your available equity you’d be able to access when refinancing your home loan.
4. Apply for a construction loan
If you’re wondering how to finance a renovation that involves a substantial amount of work and serious costs, then a construction loan could be a viable solution for you. Construction loans are typically only available for sizable extensions or complete knock-down/rebuild projects. Instead of receiving a lump sum of money, your lender will agree to a schedule of progress payments which will be invoiced throughout the project. As each agreed-upon stage is completed, the builder will issue an invoice, and the lender will release the funds needed to pay that invoice. While a construction loan can be more complex to set up, it can also save homeowners on interest (particularly if the project is going to take months to complete). This is because the lender will only charge interest on the percentage of the loan that has been released, not the total sum.
5. Obtain a personal loan
For smaller renovations (costing less than $30,000), you could apply for a personal loan. Personal loans often don’t require any form of collateral, and they can be a lot faster and simpler to obtain than some of the other renovation finance options available. Bear in mind that a personal loan will typically have a higher interest rate than a home loan, with a shorter loan term. This means that your minimum monthly repayments will probably be higher, and you could end up paying more interest overall. But it also means you’ll be able to pay off the debt sooner than if it was incorporated into a 30-year mortgage.
6. Pay for it on a credit card
Credit cards are not a good solution for funding a renovation unless it is a small-scale project that you can pay off quickly. Credit cards have some of the highest interest rates of all the home improvement loans in Australia, meaning you could end up paying a lot more than you budgeted for by the time you’ve paid off the credit card balance. Even if your credit card has a lower than average interest rate (9.80% p.a. is considered a good interest rate for a credit card), you’ll likely be charged at a higher rate (21%+) if you need cash withdrawals to pay your contractors.
How to Get a Renovation Loan in Brisbane
A Brisbane mortgage broker can provide expert advice on how to finance home renovations in Queensland. To find out more about renovation loans and how they work, contact the team at North Brisbane Home Loans today.