Financing a Renovation - Loan, credit card or overdraft?

Real estate agents sometimes refer to properties that need a lot of structural work as a “renovator’s dream”. Realistically, finding the most convenient way to pay for any renovations is probably the real ‘dream’ for home owners. Depending on your personal situation, here are some of the options:

Refinance your existing home loan

For those with enough equity built up in their existing home loan, paying for renovations can be as simple as refinancing their existing home loan – although read our refinancing tips first.

If you are able to borrow the money needed for the renovation based on your existing home equity, then a simple way to set up a refinance is to increase your loan size and place the renovation funds into a 100% offset account. That way, you are effectively not paying interest on the “renovation” amount until you use the funds.

Another option is a line of credit, which also lets you access funds as you need it and charges interest on the balance owing on your account. Have a look at our “revolving line of credit” database to get an idea of the interest rates and costs.

Refinancing is essentially the same as taking out a new home loan, so make sure you shop around for a competitive rate. Check what is available on our database here, using our comparison tool, or rather see the comparison table below for a snapshot of the low rate variable home loans on offer that feature offset accounts. Please note that this table features products that are based on a loan amount of $350,000 with a LVR of 80%, under a refinance profile in NSW with links direct to the providers website.

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Apply for a construction loan

If you don’t have enough equity in your property to borrow the amount that you need for your renovations outright, you may need to look at a construction loan.

A construction loan is a loan based on the final (post renovation) value of your property, which allows you to draw down funds progressively as the renovation-related invoices come in. These loans can be interest-only for a period of time and will revert to principal and interest at a future date.

Take out a personal loan

If your renovating costs are relatively small, a personal loan might be a fast and convenient way of funding them.  Personal loans come in two forms, either secured or unsecured. Interest rates vary widely – from under 6% to more than 18% – depending on the product and the consumer applying for the loan.

Secured finance, in general, will always be cheaper than unsecured. Personal loans are no different and there are a range of assets which you can secure the loan against, such as term deposits and property.  Have a look at the rates on offer on our database.

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Book it up on credit card

Credit cards, in comparison to the other finance options available, are a simple and effective way to access credit. Most institutions are able to approve credit cards on the spot in the branch or online. When it comes to accessing the funds, it is easy as pulling the card out of your wallet and paying for your goods.

This convenience comes at a price though: currently the average interest rate on credit cards is in excess of 17%. That said, some cards on the market do currently have rates of less than 10%.

There are, however, some points to consider before proceeding with this option for home renovations. The main one being the cost of your renovations and the realistic time-frame in which you could repay the debt. If it?s a lot of money and a long repayment time-frame, your modest reno could end up costing a high-end price.

Take out an overdraft

Depending on your circumstances, an overdraft may be one of the better options. The overdraft will be attached to a nominated bank account and will allow you to draw up to your credit limit. In effect, once you use all of your own funds within the account, you then start accessing the overdraft. Instead of paying interest on the whole amount, like you would with a personal loan, you are only paying interest on the amount you use.

If you are a weekend renovator undertaking smaller tasks here and there, rather then being slapped with interest on your whole ‘loan’, this will allow you to manage your debt depending on your needs at the time. The danger, of course, is that there is no set repayment date.

However you finance your reno, make sure you have costed your work carefully, and try to keep within budget.

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