Renovation loans explained
From small DIY fix-ups through to major re-construction projects, renovations can be a great way to add value to your home. There are a number of finance options available to renovators, so it’s important to understand which type is best suited to your circumstances.
Home Equity Loan
If you’re planning substantial renovations, a home equity loan might be worth exploring. This involves refinancing your existing home loan to release some of its equity, which can then be used to finance your renovation. To be eligible, your existing lending will need to be less than 80% of the value of the property, and you’ll need to be able to prove you’re in a financial position to service the loan.
Refinancing your mortgage will let you borrow additional funds to put towards your renovation. With interest rates currently low, this may be an affordable option. However, refinancing is essentially the same as taking out a new home loan, so it’s important you shop around for the best rates. A mortgage adviser can help you to do this.
If structural changes are being made, homeowners can apply for a construction loan, which will be based on the post-renovation value of your property. This type of loan allows you to draw funds progressively throughout the renovation period, but does require planning permission. Lenders will need to see a fixed-price building contract with plans and specifications for the build before a loan can be approved.
If you’re undertaking a small renovation, then a personal loan might be a good option. Bear in mind, however, that interest rates can be high, so this type of loan may only make financial sense if the amount you are looking to borrow is relatively small.
Credit Cards and Overdrafts
Credit cards and overdrafts can be easy to get, but need to be carefully managed to avoid high interest rate charges. Most banks can approve your funds on the spot or online, but it’s important to shop around for the lowest rates. Try to find an option that offers an interest free period, and pay off the full balance before before the due date. Remember, if you’re borrowing a lot of money and you’re not in a position to pay it back quickly, your renovation could end up being more expensive than you had initially planned.