Once you have established that you have the right equity position and can afford the loan, then you really want to assess what is the real cost of borrowing the money for renovations.
The Cost of Renovation
So, carrying on from our previous example of Mr & Mrs Average – they are looking to borrow an additional $160,000 for the renovation.
Now a good calculator to use for this purpose is the P&I / IO calculator on the State Custodians Mortgage Company website. Using this calculator we see that borrowing $160,000 at an interest rate of 7% over a 30 year term will cost $223,214.24 in interest.
That is just on that $160,000 portion of their loan for the renovation (it doesn’t include what they are already paying on their existing mortgage of $80,000) AND the other thing to note is that $223,214.24 does NOT include the principle amount of $160,000 that has to be repaid. As you can see, once you factor that in – then the total cost of that loan is $383,214.24.
Yes – borrowing money to renovate does come at a cost. You can use this calculator to work out for yourself the benefits of paying the amount off early (ie: reducing the loan term): or the benefit of finding a cheaper interest rate – ie: refinancing into a better loan: or simply choosing to borrow a lower amount and scaling back the renovation plans:
The total cost of your renovation is a really important factor not just because it determines how much you are paying in interest – but it goes to determining other key issues including (1) are you over-capitalising and not actually going to receive a commensurate benefit in the capital gain of the property and (2) is the loan for the renovation of such magnitude that it becomes a construction loan?