- Consider a variable home loan
Variable interest rate mortgages are the most popular kind of home loan. Variable rates are interest rates that can increase or decrease over the life of the loan. Both external factors, such as the Reserve Bank’s setting of the official cash rate, and internal factors, such as the cost of administering and financing the loan, can influence variable interest rates. Variable interest rates are generally lower than fixed rates, and standard variable loans can be more flexible, with features such as access to Offset and Redraw facilities, and the ability to make extra repayments without being penalised.
- Investigate whether a fixed rate loan may be suitable
For some people, the security of a fixed interest rate loan may be a more suitable option to finance their renovation. Fixed loans are mortgages where the interest rate is fixed for an agreed period, usually between one and 10 years. Having a fixed rate loan means you will know exactly what your repayments will be over the fixed period. That can make budgeting easier, and when it comes to renovations, sticking to a budget can be important.
- Don’t forget about your equity
Financing a renovation doesn’t have to mean taking out a new loan. If you have been paying off your current mortgage for a number of years, you have probably built up equity in your home. Equity is calculated on the difference between what your home is worth now, and how much money you still owe on it. For example, if your home is worth $500,000 today, and your mortgage is $250,000, you may have up to $250,000 equity in your home. You can tap into your equity to renovate your home, or use it for a range of other reasons.
- Take a look at construction loans
If you are planning a major renovation, it can be a smart move to look at whether a construction loan is a suitable option. Construction loans operate almost exactly the same as regular home loans, but with one significant difference. With a construction loan, you can stagger the drawdown of the loan as your renovation reaches certain agreed stages. If you are using a builder to renovate, ask for a fixed price contract. Once there is proof a construction phase has been met, the bank or lender will release the funds for that stage. The benefit to you is that you make repayments based on your loan balance that will only be charged on the amount of money that has been paid out, rather than the whole mortgage. You may need to get pre-approval for construction loans, so take that into account when working out whether they are the right way to go. Construction loans operate as a normal mortgage once all the payments have been made and the renovation has been completed.