Financing a renovation - loan, refinance, redraw or out of pocket?

Depending on your personal situation and the renovation you have in mind, there are several financing options that may be available to you to fund the work. Here are five options you may like to consider.

1. Offset, redraw or savings: Pay out of your own pocket

To avoid taking on more debt, a renovator may decide to use funds from a savings account, withdraw money built up in their home loan’s offset or redraw facility, or sell investments such as shares or property to fund their project. Using your own money to finance renovations may be more straightforward and potentially be less financially risky than borrowing money. Using this method could also mean you would be free to sit back and enjoy the fruits of your renovation work without having to worry about paying back any extra debt and incurring interest costs.

However, there are a couple of points that could be worth keeping in mind:

• Offset accounts and redraw facilities are features on home loans. It allows the home owner to put their money into their home loan, or an account linked to it, (over and above home loan repayments) to help reduce the amount of interest payable on that loan. The extra funds can typically be accessed by the home owner when needed, according to the lender’s conditions. If you’re considering accessing money via an offset or redraw facility, you may want to check the effect this could have on your loan in the long run. Money saved in an offset facility reduces the interest you’re liable to pay on top of the loan’s principal, so reducing the amount being offset against your home loan could mean you end up paying more overall and any time shaved off your loan term by the reduction in interest would be lost.
• If you’re planning on using savings to finance your renovations, it may be worth checking that after you’ve withdrawn the amount required for your renovations, you’re still left with an ‘emergency fund’. This is a fund that can potentially help you to deal with any unexpected expenses that could pop up, like an insurance excess or a car service.
• Cashing in investments requires careful consideration, as markets can fluctuate without warning. There can also be tax implications if selling involves making a capital gain, or profit. It could be a good idea to seek professional advice before making a decision.

2. Refinance your home loan

For those with enough equity built up in their property, refinancing could be an option to consider. Equity is the difference between the value of an asset, such as your home, and how much you still owe on your mortgage. Refinancing may allow you to leverage your equity to borrow the extra funds required to complete your project. You could either renegotiate your home loan with your bank to top up the amount of your existing loan (or to obtain a new one), or find another bank that is offering a better interest rate or conditions.

It’s important to note that there can be fees and charges associated with refinancing a home loan, and that the extra funds will impact loan repayments or the length of your loan. It’s important to note that there can be fees and charges associated with refinancing a home loan, and that the extra funds will impact loan repayments or the length of your loan. And, you would most likely start paying interest on the additional money straight away, even though you may not need it until payments are due across the course of the construction project. One course of action could be to increase your loan size and place the renovation funds into a 100% offset account (assuming your home loan has an offset facility). This would, generally speaking, prevent you from having to pay any interest on the additional amount until you need to use it.

Another option to consider could be to refinance with a line of credit home loan, which is designed to let you access funds as you need them and charges interest on the balance owing on your account.

In some respects, refinancing is a similar commitment and process to taking out a new home loan, so make sure you consider the implications it could have on your wider finances and, if you do decide to refinance, shop around for a competitive product.