home renovation loanRenovating your existing home can be a very sensible move, as opposed to selling and buying something else. After all you know your existing home, you know the neighbours  – where as you really don’t know a place until you live in it and there are lots of expenses over and above moving costs.

Lets look at the costs of selling and buying another home using for example $300,000;

  • selling agents fees – typically 3% or $9,000 ,
  • stamp duty and other government charges – allow at least 4% or $12,000
  • usually when you move you want something better and that usually costs more so allow for finance costs. Just because your existing loan says it is “portable” don’t expect this to work, as it rarely does,
  • pro-rata charges already paid by seller- such as council rates etc
  • removalist charges

As you can see it would not be unusual to cost $25,000 and that does not include the additional purchase price of a better property. Check our check our selling costs calculator and our buying buying costs calculator to check the real cost of moving.

The Biggest Mistake

The most common and biggest mistake we see is where people think their renovation is only going to cost say $30,000 and they have that much easy in their redraw and credit cards and away they go – hammer in hand – bent on destruction.

The problem occurs when the $30,000 is used up and you may have gotten carried away or more likely found white ants in the ensuite and as a result you are out of cash and a house that is not really habitable.

You now have a number of really big issues to deal with:

  • you have probably breached your mortgage contract by attacking the house which secures the loan – your current lender will probably be very unimpressed,
  • your credit scoring is going to suffer as lenders do not like to deal with people who irresponsibly (in their eyes) max out their credit cards
  • a new lender is going to be very hesitant to take over an incomplete property as security – if they do the valuation will probably be substantially lower than you expect. This can mean that if your equity was already tight you can have major issues as the LMI (insurers) will also be very hesitant to accept you.

The moral is – do not start knocking things down until you have adequate financial arrangements in place.

What do lenders expect

If the renovations are minor eg: kitchen outfitting then a small line of credit or loan top up with redraw is probably fine. The lender will want you to get at least two quotes for labour and materials but they generally don’t require a contract nor do they bother with inspections and valuations.

If the renovation is substantial – typically defined as ‘any change to the roof line’ and this would include additional rooms – in these cases the lenders want a licensed builder on the job and they want a fixed price contract.

Should I Refinance

In some cases you may have no choice but to refinance to a lender who will offer the flexibility that you need. Meanwhile any renovation over say $30,000 will involve a pretty rigorous application process ( even if it is called a top-up) you will be required to provide income plus assets and liabilities figures. So now might be a good idea to review your options and look at a full refinance.

Owner Builder

This is not out of the question however lenders are understandably dubious. If you have costed plans, council approvals etc then some lenders will agree to finance each stage on completion ie: you fix the bathroom – some funds, then you add the games room – more funds etc. Only a few lenders will do this so get it in writing before you commit.

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