How to refinance to renovate

Refinancing your assets to renovate a property is a significant decision that will hopefully improve your standard of living or add substantial value to your property.

Refinancing isn’t as straightforward as you might expect. The type of renovation proposed goes a long way to dictating the loan required. If the wrong loan is chosen, you could be left with a pile of unexpected debt.

Know your budget

Before considering refinancing, you need to have a clear idea of your budget.

If you underestimate your budget, you run the risk of getting knocked back from your lender if there has been a cost blow out.

Be conservative with your projection. If you think you need $100,000, allow for contingencies and apply for an additional 10% -20% just in case, if you can afford it. The key is stick to your budget. What you don’t need can be cancelled once the building works are completed.

Line of credit loan (Home equity loan)

Also known as an equity loan, to be eligible, one must be looking to make upgrades to the cosmetic domain of their property.

Installing a new bathroom or kitchen, painting the interior or exterior of the house and other basic construction falls under a line of credit loan.

These renovations, often, do not supersede the costs of structural changes, so homeowners can call on up to 80 per cent of their Loan-to-Value Ratio (LVR).

A line of credit loan is a “revolving door” of credit that combines your home loan, daily spending and savings into one loan.

If you choose a line of credit home loan, it essentially works as a large credit card. You can use it to purchase cars, cosmetic renovations and other investments. However, the interest-only charge starts when the equity is drawn down.

Keep in mind, line of credit loans provide you with money that can gather interest quickly, so if you are ill disciplined with repayments or money, speak to that matches your unique circumstances.

Construction loans

Construction loans are suitable for structural work in your home, for example, if you’re adding a new room or making changes to the roof.

 Construction loans give homeowners the opportunity to access larger sums of money, with the amount dependent upon the expected value of the property after renovations are completed.

The advantage of a construction loan is that the interest is calculated on the outstanding amount, not the maximum amount borrowed. This means you have more money available in your kitty, but only pay interest on the money you choose to spend. For this reason, the broker may recommend that you apply for just one loan, but leave some leeway in your borrowed kitty.

When applying for a construction loan, council approval and a fixed price-building contract are required.

Your lender will appoint an assessor to value your construction at each stage of the renovation. This will happen before you pay your instalment. When construction is complete, speak to your mortgage broker as you may be able to refinance back to the loan of your choice.

When looking at both these loans, consumers can call on other property they own to boost their overall borrowing amount if they wish.

Broker advice

If you speak to a broker, they will be able to determine which loan will give you the options you seek.  This advice is essential, as a poorly planned construction loan could cost you more down the road.

Consumers should ask their broker, ‘What type of loan am I eligible for?’, because if you don’t get your construction loan right, you may be jeopardising your bank security.

 

Want to help your kids buy property

The real estate market can be tough for young adults, but as a parent you may be able to lend a helping hand. We tell you how.

  1. Parent-to-child loan

A parent-to-child loan is when a parent lends their child money. This is a formal, legally binding arrangement, administered by an independent third party. At the start of the loan period, both parties agree to terms including repayment amounts, a schedule and a process to manage defaults.

  • Benefits: You can set generous terms for your child, but your assets, savings and credit rating are somewhat protected as you are not the borrower.
  • Drawbacks: There are legal implications for your child if they have a spouse and the relationship breaks down, in that the spouse could try to claim some of the loan proceeds as an asset of the relationship to which they are entitled. There are also tax considerations for both parties.
  1. Family guarantee

If your child doesn’t have enough security for a mortgage, you could provide a family guarantee. This is where you use some of the equity in your own home as part of the security. For example, your equity might cover 20% of the security, and your child’s new property would be the other 80%. It’s also known as a guarantor loan.

This can be a temporary arrangement until your child has paid down the loan to an acceptable level.

  • Benefits: You have the option of guaranteeing only a portion of the loan.
  • Drawbacks: If your child defaults, your assets are at risk.
  1. Becoming a co-applicant

You can help your child secure a loan if you sign on as a co-applicant. This means you’re equally as responsible as your child for meeting repayments. The lender will consider your assets in its borrower’s assessment.

  • Benefits: Your child can obtain a loan with a low income.
  • Drawbacks: If your child stops making repayments, you’re responsible for making them. If you can’t make the repayments, it will affect your credit rating.
  1. Gift

When you give your child money but don’t expect it to be repaid, it’s considered a gift. You may need to sign a statement to say it’s a gift, not a loan.

  • Benefits: You can provide financial help, possibly without the legal, tax or financial implications of a formal arrangement.
  • Drawbacks: If your child has a spouse and their relationship breaks down, the former partner could make a claim for the property.
  1. Assistance in kind

If you’re risk averse, consider providing assistance in kind; that is, covering some of the expenses that come along with buying a property. You could pay for services such as a property survey or conveyancing fees, or help with stamp duty.

  • Benefits: You can give practical financial assistance.
  • Drawbacks: The amount of money you provide may be more than what your child ends up spending. For example, you might want to contribute $20,000 but the services cost $15,000. In this case, the rest of the amount is subject to the terms of a gift or loan.

Make sure you’re well informed about your options when giving or lending money so you can remain in the best position to help your child become a home owner. You can contact your mortgage broker to discuss the right financial arrangement for your family.

 

– Loan Hub