Are home renovations on your wishlist? Planning to upgrade your kitchen? Or maybe you bought a fixer-upper dream on the Sunshine Coast and you’re waiting for your savings to build before you hire tradies? Accessing your increased equity while property values continue to climb in south-east Queensland may be another way to fund your renovation. Let us guide you through the pros and cons of accessing equity to fund your renovation.
What is a home equity loan?
Firstly, let us explain how a home equity loan works in Australia. You could be approved for a home equity loan, sometimes known as a “cash out loan” if you have enough usable equity on your property. Well what is usable Equity you ask? Usable home equity is calculated as a percentage of your property value (what the bank values your property at) less any debt secured to your property.
For instance, if your home is valued at $650,000 then the bank can lend you 80% of that Value being $520,000. If you still owe $250,000, then your usable home equity available is $270,000. We can help you understand how much equity you can unlock for a home equity loan purpose in the most cost effective manner.
A home equity loan can be either open-ended or closed-end. A closed-end loan is ideal for making a single purchase with a set amount of money. This is usually a lump sum payment similar to your initial mortgage and is often used for things just like home renovations.
On the other hand, an open-ended home equity line of credit (HELOC) is ideal if you require ongoing funds that are available to replenish and redraw upon, similar in function to a credit card but with greater borrowing power.
What are the benefits of using home equity for renovations?
- A home equity loan will provide you with the funds available to pay for your renovations. Strategically renovating your home should increase your market value which will benefit you when selling the property and paying off your mortgage.
- Being approved for a home equity loan means you will be able to access a large sum of money without having to sell your property. Using your equity in your existing home means you can withdraw it from your loan when you need it.
- You will have one streamlined payment using a home equity loan instead of juggling two loans, one for your house and one for your renovations.
- You’ll generally be given a lower interest rate on a home equity loan compared to if you used another type of loan to fund renovations.
What are the cons of accessing your equity to pay for renovations?
- Your home is collateral on your home equity loan meaning that you will be increasing your debt level making your ongoing repayments higher.
- Increasing your debt load will increase how much you owe your lender – your personal financial situation needs to be taken into consideration when deciding if this is right for you.
- If you struggle with budgeting or managing your finances, a home equity loan can be very tempting to spend the large amount of money on things other than your renovations, which would leave you with a bigger debt and unfinished renos!
- There could be fees and costs you have not considered due to changing home loan products or lenders in order to access your equity for renovations.
- Your loan to Valuation Ratio (LVR) may increase when taking out a home equity loan, meaning you could need to take our Lenders Mortgage Insurance (LMI) as part of your new application.
How do I get a home equity loan for my renovations?
If you’ve read through these pros and cons and decided a home equity loan is for you, then applying for a home equity loan for home renovations is quite similar to applying for a mortgage. You will be required to provide income and employment information and possibly have a property valuation as part of the application process. When your home equity loan is approved and funded it will be disbursed to you in one lump sum. You will begin making regular monthly repayments immediately.
Another option for funding your home renovations is with a HELOC where the interest rate is typically variable and the loan starts with a draw period generally lasting 10 years, during which you can draw on the line of credit as needed and make interest-only payments. Once the draw period ends, the repayment period begins. You then begin paying on both the principal and interest for a term that usually lasts 20 years. These loans come at higher rates though and are not always suitable.
If you’ve decided that a home equity loan is your best option for your renovations, talk to us to get started.