A key advantage in owning your own home is seeing its value increase – up an average of 21 per cent nationally last year. That increased value can be unlocked by using the equity in your mortgage to finance such things as a granny flat, create a home office, or install a new kitchen or bathroom to add to the enjoyment of your current home and increase its value further by tens of thousands of dollars.
Equity is the difference between the value of your home and the size of your home loan. And you can invest this credit to improve your home rather than buy a new property, spending weekends house-hunting, enduring the stress of auctions and negotiation and paying taxes, levies and legal fees. It’s a reason why renovations are all the rage right now.
You’ll need to check that you have a suitable lending arrangement to spend your equity. You may need to apply to refinance. Your lender will independently revalue your home as part of the approval process, so it can take some time to finalise. Your broker will step you through the process.
By taking this approach to financing a renovation, you’ll avoid the expense of applying for a new loan or being forced into a separate loan that may have additional fees and a higher interest rate.
Here are a few tips before diving into a renovation project.
- Ask at least three reputable builders or suppliers for quotes. You should have a good idea of what your project will cost before applying to use the equity in your home. Add an extra 10 to 20 per cent to the quotes to cover unforeseen problems during construction.
- Discuss your plan with your mortgage broker or a qualified financial adviser. You want to be confident your planned renovation is affordable, meets your overall wealth-creation goals and is a good investment.
- Talk to a real estate agent about the local market in your area, so you can weigh up the value of renovating against moving home. Both choices have their challenges and benefits. Agents often have great ideas on features that add value or if you’d be over-capitalising.
- Check with your broker whether you may be required to pay Lenders Mortgage Insurance if you go beyond the 80 per cent loan-to-value ratio. It’s insurance that protects the lender in the event you default.
