For many homeowners there comes a time when they need to decide to move to a larger house or if they should remodel the current property to suit their needs. The choice to upgrade their accommodation is usually brought on by either an expanding family or they feel they need something more comfortable to live in.
Depending on the amount of work required to do a home remodel, owners will need to think about where to get the financing from. Are personal loans a good option? Should I refinance the house? Or should we look at a new property?
Tapping into savings accounts
Using existing savings you have is a simple way to get the money needed for renovations. If you have been a conscientious saver you may have all the funding you need. The downside to this method of gaining finance for property work is that you have then used up your emergency fund and it leaves little breathing room should you have large unexpected bills to pay.
The upside to leveraging your savings is that current interest rates are so low that you probably do not make any money from cash sitting in a bank. A good rule of thumb is to use less than 50% of savings for renovation work, if the bill is more than that, you may be better off looking to borrow from a bank.
Using the equity in your current house
For more substantial home remodels most people will look to get finance utilising the equity in their property. The main reason to use the equity they have is home loans are always at a more favourable rate than personal loans and credit cards.
An example of using equity:
Home value: $750,000
Outstanding Loan: $375,000
The amount you can borrow: $225,000
New Loan Amount: $600,000
Above is an example based on owners who have paid off half of the home loan amount and as you can see they can release enough money for extensive home remodelling and extensions, while also having funds left over. Depending on your chosen lender, there are various options online where you can find out how much equity you have and how much you can conversely borrow for your project.
The main benefits of using a home loan to carry out work on your house will be the favourable interest rates on loans, and also you can borrow just as much as you need, so if the contractor tells you it will cost $80,000 to do the work on the property you can just borrow the same amount. This keeps your repayments low while still giving you the opportunity to improve your accommodation.
Short Term Loans as Financing
Personal loans can be helpful for small renovation jobs on your home, but you should be wary about using personal loans and credit cards to fund essential jobs. A typical rate for a personal loan is between 8% up to 15% which is a significant difference compared to home loans which are typically below 5%. These rate differences aren’t so significant when you are borrowing small amounts for short periods like $10,000 over six months.
This is where these loans can be helpful, especially if you are only looking to do small jobs on the house like adding an en-suite or getting a new kitchen. For those looking to do extensive work on the home like adding rooms, a new roof or a complete rewire you should look to use the equity you have and speak to a bank or lending institution about a home loan.
Depending on the work you will carry out you may find that contractor financing is the most suitable. Many contractors who provide services like door and window installation, roof replacement, boiler installation and more, offer finance provided through the contractor. This is a common way to pay for large jobs.
A contractor will typically have a working relationship with the loan provider which will get a better rate for you. It is also an excellent tool for the contractors to use to help get new customers onboard. This means you can get new windows and doors by just paying an initial deposit then a small monthly fee over three years. By using contractor financing along with savings you have, it may be possible to have all the work undertaken on your home with no need for home refinancing or costly personal loans and credit cards.
There is no easy answer to which option is best for you, and it may be that using a few of these suggestions together will achieve the finances you need to make your home as you want it. For smaller jobs using savings, contractor finance and personal loans may be the easiest way. For those looking to undertake extensive renovations, using a home loan will be the best option as the rates are lower. And as you increase the value of your house through upgrades and adding rooms you are increasing the equity and value of the property.