New data release by the Bureau of Statistics shows renovation loans have hit a 7-year high in trend terms, suggesting that property owners are seeking loans to improve their homes and investment properties.
With the rise of home renovations shows such as The Block and House Rules, home owners are donning their tool belts and getting out their wallets to renovate or extend.
Given the rising housing prices across Sydney, it makes sense for home owners to avoid a heated property market and take the time to improve their existing home for their own enjoyment, or in preparation for sale.
And with property valuations increasing, property owners are tapping into their equity to secure renovation loans.
What is a renovation loan?
Renovation loans enable home owners to access their available equity in their home to carry out renovation or extensions on their property.
To assess how much equity is available in a property, you subtract the outstanding mortgage against the bank valuation of the property (not a real estate agent valuation). For example, if the bank values the property at $1M, and the mortgage balance is $600,000, giving total equity of $400,000. Although there is $400,000 equity, not all of it is accessible.
Now you need to apply the LVR (loan to value ratio) and to avoid paying LMI (Lenders Mortgage Insurance), it’s best to keep the LVR at a maximum of 80% of the total value to save on costs. 80% of $1M is $800,000, and once you subtract the existing mortgage of $600,000 – the amount available for renovation is $200,000.
Once you’ve drawn down the additional $200,000, your mortgage repayments will be now be calculated at the total loan amount of $800,000.
What can I use a renovation loan for?
Generally speaking, if your renovation is under $100,000 you will just need to provide a list of the works that you’ll be doing. However, if you’re planning structural works like an extension or new building structure, you’ll need to submit the council plans and quote with your loan application.
In most cases, if you’re only planning to do minor renovations like landscaping or kitchen refurbishments under $100,000, you won’t need to provide any quotes to the bank to get approval.
How do I get a renovation loan?
Renovation loans are only available for existing mortgage holders and are different to a construction loan. The first step is organising a bank valuation of the property to assess how much equity is available. Depending on the lender you are with, the valuation company they use may provide a favourable or disappointing valuation, so it’s always best to speak to a mortgage broker like Mint Equity as we have insight into which valuers are providing the most favourable valuations. From there, we’ll assess your available equity and take you through the process of increasing your home loan so you can access the cash for your renovation.
What renovations improve property values?
Kitchens and bathroom renovations are not only beneficial to the home owner, but for resale too. The old saying ‘kitchens sell houses’ is true, so investing a good amount of your renovation budget to this area is likely to return the investment when it comes time to sell.
Renovation shows like The Block provide great inspiration for home owners who struggle to see the potential in their home. However, the not-so-handy home renovator can see the budget blow out with labour costs, so it’s important to have a realistic budget. Here are our top 5 improvements to add value;
- Kitchen renovation
- Bathroom renovation
- Additional bedroom
- Additional bathroom (if adding an additional bedroom)
- Swimming pool
To read the full report click here.