The idea of a fresh home renovation is dreamy. So is the thought of paying a chunk off your mortgage and getting a little closer to debt freedom. If you’ve found yourself with a bit of extra cash, these scenarios could be on your mind.
Both are great options, and both could be financially beneficial. But there are a few things that’ll influence the right decision – like your personal circumstances, what state your property is in and what the market is doing.
If you’re feeling completely stuck, we’re here to help. We’ve outlined the pros and cons of each option so you can put your pennies in the right place.
Pay down your mortgage – pros
Be mortgage-free faster
It’s simple – the fastest way to become mortgage-free is to increase your monthly repayments or pay a large chunk off your loan. This is a great option if you think you’d like to retire early.
Pay less interest
If you pay a lump sum off your mortgage, you’ll significantly reduce the amount of interest you pay over your loan term. This means more of your money stays in your pocket, and it could save you thousands overall.
Keep your debts all in one place
Some people like the appeal of having just one debt to think about. So if you get a home renovation loan, you’ll still have to make your regular monthly mortgage repayments. If you want to keep all your debts in one basket, paying down your mortgage could be your best financial decision.
Reduce your loan-to-value ratio (LVR)
Paying a lump sum off your mortgage will mean your LVR decreases, and you’ll own more of the house. This will also decrease your monthly interest payments and means you save much more over time. It may give you more options in the long run – like leveraging your home to buy an investment property.
Pay down your mortgage – cons
Face early repayment fees
If part or all of your mortgage is on a floating term, you can pay a lump sum without penalty. But if your mortgage is fixed, you’ll be charged for making any payments on top of your regular repayment. If this is the case, you’re better off sticking to your regular repayments and using your cash for a renovation.
Miss out on increasing the value of your home
Depending on the state of your home, renovations could significantly increase its value. Likewise, if you neglect a mouldy bathroom that’s affecting your home’s structure, you’ll probably find that it works against any value increases and costs you more in the long run. Focusing too narrowly on paying down debt could work against you – think big-picture and figure out the best long-term solution.
Renovate your home – pros
Increase your home’s value
Some renovations could add significant value to your property, which, come sale time, will mean you get a much higher price (more even than you spent on your renovation). If you think you’d like to sell in the not-too-distant future, investing a few extra dollars on a renovation now could up your sale price. Just be clear whether you’re renovating to make a smart financial decision, or purely to create a nicer home to live in.
Add lifestyle enjoyment
If you’re going to live in your current house for the foreseeable future, you have to weigh up what’s important to you. If your current home doesn’t bring you much joy or it’s in serious need of some TLC, using the cash to renovate could increase your enjoyment of living in it. If your home already offers everything you need and you like it as-is, you might consider the loan payment instead.
Renovate your home – cons
Get stuck with big debt
If you’re finding that your mortgage is more than you can manage, taking out a further loan for a renovation might not be the smartest idea. You’ll have the burden of a second debt, as well as the weight of your existing home loan on your shoulders. If this is your situation, it might be best to pay a large chunk off your loan with your extra cash and reduce your overall interest.
Have your cake and eat it too
If you’ve had your mortgage for a while, you may have the option to top it up. You can borrow additional funds against the equity you have in your home and use that extra cash to do your home renovation. You’ll have the benefit of paying down the mortgage, as well as a dreamy new kitchen.
There’s a lot to consider when thinking about mortgages and home renovations. And ultimately, it comes down to your personal circumstances – your best bet is to sit down with a professional, talk through your options and ensure you make the most financially sensible decision.
Looking to renovate your home or pay down your mortgage? Global Finance can help. Contact us today to book in a no-obligation chat.
**These are general guidelines and are by no means a reflection of bank or lending policies