- What is home loan refinancing?
- How to refinance a home loan for renovations.
- The positives and negatives of refinancing.
Refinancing can be a great way to obtain capital for a renovation. Understanding the benefits and the possible negatives is a significant first step in deciding if it’s the best option for you.
Renovations can significantly increase your quality of life and the property’s overall worth. Still, they may extend the duration of your loan so that you end up paying out more interest. The information below can help you weigh the pros and cons and determine if refinancing is the right way to fund a renovation.
In this guide
What is home loan refinancing?
Refinancing a home loan may refer to:
- transferring your home loan to a new lender to secure a lower interest rate or improved loan features;
- extending the life of a loan that has come to the end of its term;
- increasing the amount of money you owe with a new lender or your current one to access cash from the equity you have built up in your home.
When considering refinancing, compare your current loan to others on the market to see if you’re getting the best rates.
Refinancing is similar to taking out a new loan; there are refinancing fees, so make sure you consider how it will affect your finances before applying.
How does refinancing for renovations work?
Refinancing to renovate is done by increasing your current loan amount to access the equity you have in your home (the difference between its current market value and the amount you still owe on your home loan) and using the increase to pay for home renovations.
Top tips for refinancing a home loan for renovations
Working out the best way to refinance a home loan can be difficult. Here are a few tips to help you make a plan.
- Create a budget. Having a financial plan in place will ensure you don't spend more cash than you have accessed from the refinancing. Lenders may also require you to have a renovation plan ready, so they know approximately how much it will add to your property value.
- Renovating your property can add value to it. But a useful rule to remember when refinancing your current home loan is to not spend more than 10% of the median property value on a renovation.
- Compare refinance home loans. Shopping around can help determine if your current lender is giving you the best rates available to you. Different lenders offer different loan amounts, interest rates, features and fees.
Pros and cons
There are always pros and cons when considering taking out a loan. Considering all aspects of refinancing will help you determine if it’s the right choice for you.
Pros
- Lower interest. Refinancing may allow you to get a more competitive interest rate than your current one and to fund your renovations at a lower rate than taking out a personal loan. You may renegotiate your rate with your current lender or find a lender that offers a lower interest rate.
- Equity access. Equity is the difference between the amount you owe on your mortgage and the amount your home is worth. Refinancing gives you access to any equity you’ve built up in your home.
- Simplified repayments. Refinancing a home loan, rather than taking out a separate new loan, can keep your monthly repayments simple and your total interest paid low.
Cons
- Cost. You will face refinancing costs, which can be steep. Fees can cost prospective buyers hundreds or even thousands of dollars. You may also be extending the term of your loan, which means you may pay more interest than you would have done if you’d left it alone.
- Credit score. Applying to refinance a home loan could negatively impact your credit score due to a hard enquiry on your credit history made by a potential lender and by the closure of your existing loan account. A lower credit score could affect the interest rate you’re offered on future loans.
- Insurance. Mortgage insurance can be costly if your equity is less than 20% of the property value. Lenders may require you to take out LMI.
Alternative ways to refinance a renovation
If refinancing your home loan isn’t right for you, alternative options exist to finance your renovation.
- Cash. Cash is a cheap way to finance a renovation if you have it available. However, it’s best not to use emergency funds or money set aside for other expenses.
- Personal loan. A personal loan can be a good choice for someone who needs fast cash because, despite the higher interest rate, it may cost you less overall since the loan term will be shorter. Be sure to look into loans that cover home renovations.
- Line of credit. Opening a line of credit such as an overdraft or credit card, or using an existing one, could be an option for someone looking to complete smaller renovations.
- Construction loan. Construction loans can be used if you’re doing structural work to your home. They allow homeowners access to more significant sums of money depending on the property’s expected value after renovations.
Conclusion
Deciding if refinancing for a renovation is a good choice can be difficult. There are many advantages but a few disadvantages too.
When considering any type of loan, it’s imperative to factor in the cost and the potential gain. If you decide to refinance your home loan, be sure to consider how it will affect your overall finances.
Don’t forget to shop around so you can find the best rates available to you. Refinancing for a renovation doesn’t have to be confusing. Having a plan and a budget can get you on the best track to refinancing the right way and completing your dream home renovation.
