Home renovations are so popular in New Zealand they could almost be considered a national sport. Whether it’s a brand-new kitchen or a full-house transformation, breathing new life into out-dated rooms can add more than a few dollars to the value of your home.
But, financing said renovation can cost anywhere between a few thousand to tens of thousands of dollars – depending on the size of the project. That’s a lot of money to borrow – especially on top of existing home loan repayments. That’s why finding a suitable finance option (within budget!) is often a barrier to home improvements.
There are several finance paths you can take to get the renovation show on the road. This article outlines everything you need to know about renovation loans – and maybe the option you’ve been looking for.
Renovation Loans – what are they?
There are two types of renovation loans. Loans that are structural change loans and non- structural change loans. They will help you finance the cost of upgrading, remodelling or repairing a residential property.
Here are the facts:
- Loan amounts are limited – This type of loan differs from bank to bank and usually has a cap for non-structural changes and uncapped on structural based change loans with conditions in place.
- Based on your income and credit history. Again, like a personal loan, the amount you can borrow depends on your income and credit history. You may choose to secure the loan using the equity in your home or leave it unsecured.
- Funds are paid in stages – Unlike a traditional home loan, the funds you borrow will be paid out at different stages of the renovation timeline – rather than a lump sum only on structural loans.
- Separate from your home loan – Repaying a renovation loan is like repaying any other personal debt. You’ll need to make fixed repayments over an agreed period – on top of your monthly mortgage payments.
- Non-Structural renovations – Can include things like changing the blinds, bathroom tiles, carpets, furniture, or fixtures.
- Structural renovations – examples could be extending a bedroom, build a kitchen, build a new bathroom etc.
- Structural renovations – may require council consent, build contract, CCC, valuation, etc. Repayments may be progressive.
So, is that new bathroom worth it?
Your return on renovation
Taking on another loan repayment is a big financial commitment, and should be considered carefully. Some renovations could add significant value to your property, which, come sale time, will give you leverage to ask for a higher price. This might be an additional bedroom or an extra bathroom.
Other renovations may be more subtle but could be well worth the return on investment if they make your home safer and more liveable for longer.
Whatever the scope, it’s important you calculate the cost of your renovation before applying for a renovation loan. Work with a professional to ensure you’re accounting for all the niggly costs that people often forget – like consents or disposal – then crunch the numbers to make sure your plan fits your budget.
Do the legwork upfront – it’ll save you money in the long-run
Like with any loan, you should only consider borrowing money for renovations if you’re confident they’ll increase the value of your property or reduce long-term repair expenses. Lenders will also want to see that you’re putting their money when it counts – and you’re not at risk of over-capitalising.
Here are some points you’ll want to think about:
- Check your equity. There’s a bigger risk of defaulting on a renovation loan when you have less money invested in your home.
- Know your worth. Don’t throw money down the drain by investing too much in a renovation. Any improvements should add value to your house that future homebuyers are willing to pay for. Compare the value of your home to other properties in your neighbourhood and avoid going over the upper range of house prices in your area.
- Don’t forget GST. Make sure any quotes for renovation costs include 15% GST. Miss this and you may find yourself several thousands of dollars short in your budget.
Don’t rush – get your ducks in a row
All renovation projects require adequate financing. The better you understand the types of loans available in the market and the lending process, the easier it will be to find the most affordable option for your financial circumstances. While it might be tempting to rush into renovations, taking the time to do your homework will help minimise any unexpected bumps in the road.
Sitting down with a mortgage broker can help ease the burden and give you peace of mind that your finances can handle the load of another loan.
Looking to renovate? Get in touch with the Global Finance team today to discuss your finance options.
**These are general guidelines and are by no means a reflection of bank or lending policies