The right renovation loan will depend on your renovation type and borrowing capacity.
Whether you’re in the business of flipping houses for a profit or looking to renovate your own home, financing a renovation requires a good deal of research.
There are different types of financing when it comes to renovations, all suited for different circumstances. Discover which renovation loan could be the right option for you.
Option #1: Refinance your existing home loan
Who it’s for: If you have enough equity built up in your existing mortgage, you could consider refinancing with a bigger loan that would cover your renovation cost.
How it works: The smart approach is to place the renovation funds into an offset account so you can avoid paying interest until you need to draw funds out of the account. You could also use a line of credit — with this, you could basically access funds as you need them and interest is charged on the balance owing on the account.
It’s important to remember that refinancing is almost the same as taking out a new mortgage, so it’s imperative you shop around for the best rate.
Option #2: Apply for a construction loan
Who it’s for: If you don’t have enough equity in your mortgage to borrow the necessary amount for your renovation, a construction loan could be your next best option.
How it works: A construction loan is determined based on your property value after renovation. Its structure is such that loans are drawn down progressively as construction invoices come in. The loan adopts an interest-only structure for a certain period of time, before reverting back to principal-and-interest.
Option #3: Take out a personal loan
Who it’s for: Another option could be to take out personal loans but in most cases, this isn’t advisable because of the high-interest rates. Typically, these rates could go from 6% to more than 18% depending on the product and the borrower’s history.
How it works: Personal loans come in two forms; secured and unsecured. Secured loans are backed up by an asset such as property or a term deposit. As such, they are much cheaper than unsecured personal loans and could be a safer option.
Option #4: Pay as you go with a credit card
Who it’s for: If you’re undertaking smaller renovation projects that are cosmetic and short-term, a credit card may be an easy option for you.
How it works: Credit cards are a simple way to pay for renovations. This convenience, however, usually comes at a high price, with interest rates hovering around 17%. That said, there are some cards that offer rates under 10%. You should consider your renovation costs as well as the project renovation time frame before choosing this option.
Option #5: Apply for an overdraft loan
Who it’s for: If your renovations are smaller in scale and could be considered ‘weekend renovations’, an overdraft loan could be the right option for you.
How it works: In essence, an overdraft would be attached to your nominated account and will allow you to draw up to the credit limit. It will come into effect once you have passed the limit. Rather than paying interest on the entire amount, you only pay interest on the money you use.
Option #6: Try a fix and flip loan
Who it’s for: This type of loan is created by lenders specifically for renovators that flip property for a living.
How it works: The fix and flip loan term is usually one year and it gives you the hard money you need to invest in property. Given the loan term is a year, this means your renovation is limited to a certain time frame.
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