Before you start renovating a property, it is vital to ensure that you can fund the whole project.
How to Fund Your Renovation from your Home Loan
This video is focused around those of you who are considering drawing down on your home loan to fund your home renovation. Once you have the information collated as to what you will have to pay the builder for the renovation, you then need to work out what this will cost you assuming you borrowed the money as a top up on your home loan.
Along the way, if you have questions about funding your renovation, please do not hesitate to give our friendly credit managers a call here at State Custodians Mortgage Company. It’s easy and simple: 13 72 62.
Key factors in renovation
There are two critical factors here (1) equity – do you have enough? And (2) affordability – can you afford to repay the higher loan amount?
First – let’s take a quick look at equity. Those who are best placed for renovation are those who have considerable equity built up in their home.
So what is equity – well, it is the difference between what your home is worth and what you owe. For example if you have a home worth $300,000 and you owe $80,000 then you have $220,000 available as equity. When you borrow more than 80% of the value of your home you have to pay expensive lenders mortgage insurance.
So to use the example of a home valued at $300,000, if you borrowed more than $270,000 (90% of the value) then you will have to your lender - LMI – lender mortgage insurance. This is an expensive cost that you would prefer to avoid.
The second issue is affordability – can you afford the additional amount of borrowings. You can determine this using a very simple calculator. This one is on the State Custodians website. All you do is complete the fields and at the bottom right hand corner it will tell you your monthly repayments and the total amount you can borrow. Remembering – that this is a guide only and does not replace getting a proper approval form your lender.
In this example it appears Mr & Mrs Average could afford to repay a loan amount as high as $390,000.
Okay – so in this example, Mr & Mrs Average could top up their home loan and use the funds for renovating. They have the equity and can afford the extra loan. Ideally they wouldn’t wish to borrow more than $240,000 (to avoid expensive LMI) so this would give them an available amount to cover all costs including the renovation of $160,000 ($240,000 less the existing home loan amount of $80,000).
The next video gives a better insight into what is the true cost of borrowing that additional $160,000?