How to refinance to renovate? 1/2

Refinancing your assets to renovate a property is a significant decision that will hopefully improve your standard of living or add substantial value to your property.

Refinancing isn’t as straightforward as you might expect. The type of renovation proposed goes a long way to dictating the loan required. If the wrong loan is chosen, you could be left with a pile of unexpected debt.

 

Know your budget

Before considering refinancing, you need to have a clear idea of your budget.

If you underestimate your budget, you run the risk of getting knocked back from your lender, according to an MFAA accredited finance broker.

“I know a lot of homeowners who have estimated a budget of say $100,000 to do renovations, only to discover it will cost a lot more,” the broker says.

“This means you may have to reapply for the loan, which banks generally don’t like.”

“Be conservative with your projection. If you think you need $100,000, I’d recommend to apply for $150,000 just in case, if you can afford it. The key is stick to your budget,” adds the broker.

The next step is to speak to your broker to determine which loan will suit your needs and objectives.

 

Line of credit loan (Home equity loan)

Also known as an equity loan, to be eligible, one must be looking to make upgrades to the cosmetic domain of their property.

Installing a new bathroom or kitchen, painting the interior or exterior of the house and other basic construction falls under a line of credit loan.

These renovations, more often than not, do not supersede the costs of structural changes, so homeowners can call on up to 80 per cent of their Loan-to-Value Ratio (LVR).

A line of credit loan is a “revolving door” of credit that combines your home loan, daily spending and savings into one loan.

To calculate the value you can borrow, subtract your current loan balance from your property value and then multiply by 80 per cent. For example, if your property is worth $500,000, and you have $250,000 left on your loan, your home equity is $250,000. You then multiply this total by 80 per cent. If you’re uncertain of your home value, contact an MFAA Accredited Finance Broker who can assist you to arrange for an appraisal or valuation.

If you choose a line of credit home loan, it essentially works as a large credit card. You can use it to purchase cars, cosmetic renovations and other investments. However, the interest-only charge starts when the equity is drawn down.

Keep in mind, line of credit loans provide you with money that can gather interest quickly, so if you are ill disciplined with repayments or money, speak to an MFAA finance broker for a plan that matches your unique circumstances.

published by MFAA

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These articles provide you with factual information only, and are not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser. The information in these articles is believed to be reliable at the time of distribution, but EFS does not warrant its completeness or accuracy. Neither EFS nor its related bodies, nor their directors, employees or agents accept any responsibility for loss or liability which may arise from accessing or reliance on any of the information contained in these articles. For information about whether a loan may be suitable for you, call EFS on 02 8041 6746.