FOR home owners thinking of renovating, it is extremely important to consider how you intend to fund the renovations.
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There are many different financing options available, but it is finding the right solution for your needs that is the key.
For instance, you may find that you have built up a certain amount of equity in your home that you could access to fund your renovation.
Equity is the difference between what the property is worth and how much is left owing on the mortgage.
So, say for example your home is worth $300,000 and you have $100,000 left to pay on your mortgage. This would leave you with $200,000 in equity.
It is important to note, however, that the amount of equity a borrower can access depends on how much the lender will let them borrow.
So you'll need to prove that you can service any increase in debt. Essentially, just because you have $200,000 in equity, doesn't mean you will be allowed to borrow all of this to fund your renovations.
Another way you could fund your renovations is through refinancing.
By refinancing your mortgage, you may be able to borrow more money to help fund your renovation plans.
And, with interest rates sitting at all-time lows and Australia's lenders hungrily competing for business at the moment, refinancing could be an ideal solution for some borrowers.
Alternatively, you could fund your renovations via a construction or building loan.
A construction loan works in a similar way to a home equity loan except that the lender will not release the full loan amount to a borrower upfront, rather they would release it to you in stages as the renovation progresses.
You could also elect to fund your home renovation by using a line of credit.
This is a slightly more complex type of funding as it lets borrowers access funds as they need them in order to pay for things like tradies or materials.
With this funding method you'd be charged interest on the balance owing on your account rather than a total loan amount.
If the renovations you have in mind are reasonably minor, you may find a personal loan is your best option.
Interest rates on personal loans are usually much higher than the interest rates charged on home loans.
This may also be a good opportunity to compare your loan to the hundreds of others to see if there is one offering a better option.
A mortgage broker, like myself, will be able to talk you through your options.
Richard Windeyer is a mortgage broker with Mortgage Choice. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Phone: Richard Windeyer on 1800 01 LOAN.
