Property guru’s and industry experts are tipping that 2016 will become a buyer’s market. But for sellers who can afford to wait until the market picks up, improving your property during the downturn might reap greater rewards when it comes time to sell.
Building approvals began to fall in May of 2015 and continued throughout last year meaning that once the current construction projects move to completion, builders and all kinds of trades are more likely to be available and looking for work. That means even smaller jobs that have been hard to find tradespeople to look at should soon be easier to resource. Those in Sydney and the Central Coast will know just how hard it is to find tradies to do smaller jobs at reasonable prices, and quickly.
For those without a cash pool, the key to financing home improvements is timing. Before property prices drop too far it’s time to get your home valued (at the highest possible price) and potentially use the equity in your property to make improvements.
What is equity and what can you do with it?
In simple terms, home equity is the value of ownership built up in a property or home and represents the current market value less any remaining money owing on the mortgage. The equity increases over time as you pay off the mortgage and the market value of the property appreciates.
It’s important to realise that your total equity is different from your usable equity. Lenders will give you access to a large percentage of it though, usually 80% but can be up to 90% depending on the lender. Since your lender is essentially lending you money against the value of your home, they won’t allow you to borrow the full amount. If house prices drop dramatically your lender won’t want to have a security that is worth less than you owe them.
Equity can be used for a variety of purposes, including buying a boat or going on holiday. However, it’s wise to reinvest the equity into improving the value of the property through renovations and extensions.
Top 5 renovations that can improve your property’s value
No other room in your home compares to the kitchen when it comes to adding value. This heart of the home will single-handedly add the largest amount of value to your property. Kitchens can make or break a sale so don’t be afraid to invest money in this room in order to ensure a high ROI (return on investment). Plan to invest 2% to 5% (ie $20k to $50k based on a $1M property value) of your current property value as your kitchen renovation budget. If you’re renovating to stay put for a while opt for a style that won’t date quickly, will appeal to a majority of the market and install decent fittings, fixtures and appliances.
The second most important room to significantly improve the value of your home is the bathroom (or adding an extra bathroom). An outdated, tired, dirty-looking bathroom will always negatively affect your property value. Aim to spend 1.5% of the property value on adding and/or upgrading bathrooms. Try and ensure that there is at least one bathroom on the same level as your property’s bedrooms for maximum appeal.
3. Swimming pool
Over 25% of Australians would opt to add an extra bedroom to their home (we’ll get to that shortly) but coming in at a close second was the Aussie favourite - the swimming pool. The important thing to remember with adding a pool to add value to your property is not to over-capitalise. Pools take a fair bit of time and money to maintain and not every buyer is going to want one. Property buyers that want a swimming pool will pay more, just perhaps not $50,000 more.
4. Outdoor entertaining areas
Australians love to entertain outdoors - pool parties, barbecues - so it comes as no real surprise that outdoor entertaining areas (particularly those that can be used all year long) add real value to your home. Not only do outdoor entertaining areas extend the liveable size of the home but add value simple because of the emotional connection these areas evoke.
5. Additional bedrooms rooms or granny flat
Adding an extra bedroom is a significant way to boost a property’s value. It can cost on average $50,000–$80,000 but can have a massive financial upside. The price difference between a three to four bedroom home is often in the range of hundred of thousands of dollars. Properties are typically valued by two primary means: land size and the number of bedrooms. A word of warning; never compromise the quality of other important rooms such as your living areas in order to add that extra bedroom. A property that was a three bedroom home with an average sized lounge room will not have significant value added to it once it becomes a four bedroom, small lounge room home.
Granny flats are back in fashion with an array of modern options available - from, low budget, flat pack options right through to premium, designer versions. Flat packs start from as low as $30,000 to buy and depending on your location and size of the granny flat, council approval may not be needed. Fully finished, the costs are likely to be in the range of $80,000 to $100,000 depending on the size and style but can result in hundreds of thousands of dollars of value being added to a property, particularly if you receive additional income from it by renting out the space.
How to access equity in your home
It’s likely that you’ll need to refinance your home loan to access your equity. This can be done through your existing bank or credit union or you might like to take the opportunity to secure a lower interest rate by changing lenders. Essentially, you’re borrowing more money from the bank against the value of your home, so new mortgage contracts need to be drawn up.
For the bank to assess how much equity is available a property valuation will need to be done. This is very different to a real estate agent valuation which is usually much higher.
If the property value has increased since you purchased it, you can now apply the lending ration to that new figure. For example, if you originally borrowed 80% of the purchase price, you can now borrow a maximum of 80% of the new value.
Here’s an example of how one of our clients refinanced to access the equity in their home.
Once the accessible equity of $150,000 has been used for the renovations, the mortgage repayments are based on the new loan amount of $800,000. As you refinance, the lender will also assess your ability to make repayments on the new loan.
In this case, the owner’s mortgage repayments only increased by $351 per month, as they were able to secure a lower interest rate than their original mortgage through the refinance.
Interest only offset loan accounts are great for renovators
Using an offset loan account linked to your mortgage that is ‘interest only’ means you only start paying interest on the money when you start using it. The alternative is to structure the equity increase on P&I (principle and interest) which means you start making repayments from the first day, even if you haven’t used the funds yet.
Once you’ve completed your renovations and paid all the bills, you can change the structure back to P&I if you wish. A good mortgage broker will be able to guide you through this process.
Turn a negative market into a positive
Making the decision to stay put and use your equity to renovate or extend will eliminate the need to sell in a buyer’s market at a reduced price. It will ensure you have a house you love to live in for now, and will add value to the property for when it does come time to sell and move on.