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In Australia, the total monthly spend on home renovations passed the $1 billion mark for the first time in February 2021 before growing to a staggering $1.14 billion in March. When compared to the average monthly home renovation cost of $680 million for the whole of 2019, it’s clear to see that Australians have been pretty busy fixing up their homes over the past year.
And there are no prizes for guessing what the main culprit was for this astronomical rise in home improvement spending. Yep, the Covid-19 pandemic.
Thanks to millions being forced indoors to curtail the spread of the virus, many people saw it as the ideal opportunity to work on the DIY projects they have been putting off for years. The money households saved from not going out combined with government stimulus checks meant that people had more funds than ever to dedicate towards their home renovations projects, and they certainly have been seizing the opportunity with both hands.
If you feel like jumping on the bandwagon and building that gym you’ve always wanted or finally installing that perfect remote workspace, here are four different ways you can finance your new project.
Use your own funds
This may seem like an obvious point, but it’s worth mentioning – considering how eager everybody appears to be to get into debt at the moment. If you already have funds sitting in a savings account, now would be an excellent time to use them. In general, if you can avoid getting into debt, then you should. This is because most credit agreements come with a cost, which means that you will end up paying more than the cost of the renovation over the long run.
Of course, this is not always the case since there are some benefits from taking out a loan. Nevertheless, paying for the renovation straight out of your pocket means that you can simply sit back and enjoy the fruits of your labor without having to worry about paying it back (plus interest). Although, it’s never a good idea to completely wipe out your savings. Try and leave yourself with an emergency fund so you can have peace of mind knowing that you will always have enough to get by.
Lastly, if you’re the type of person that is averse to getting into debt, then you could always consider cashing in your investments to fund your home renovation project. Just be sure to consider the tax implications before selling so you don’t end up worse off than you would if you would have taken out a loan.
Take out a home renovation loan
Taking out a home renovation loan is one of the most popular methods for funding your project. These loans are also referred to as construction loans in Australia and are generally used for extensive renovations that are valued at $150,000 or above. In general, construction loans are paid in stages over the course of the project rather than all at once at the start. This is because large renovations typically take longer to complete, so it wouldn’t make sense to take out all of the funds at the beginning since that means you would be paying interest unnecessarily.
Before taking out a construction loan, you need to have a few things in place prior to completing your financing application. First of all, you need to have a professional estimate of how much the job will cost. Most lenders will ask that you provide them with a signed all-inclusive contract with a builder, including quotes and plans. If approved, the lender will usually make the payments in stages directly to your builder, which means that you won’t be involved in the payment process.
Take out a personal loan
For any home renovation loan under $50,000, your best bet would be to stick with a personal loan. These types of loans are much more straightforward to set up than a construction loan, and you can sometimes get the funds sent directly to your bank account within just a couple of days once you have been accepted.
Once the funds are in your account, you can spend them as you see fit on your renovation project since you will be in complete control over how and who you pay to do the job. However, personal loans generally have a shorter-term (between two to seven years), which means that your repayments may be higher than on a construction loan (which are spread out over a more extended period). With that said, personal loans are usually a lot cheaper (in terms of total interest) and come with a much more straightforward repayment structure.
Using your mortgage equity
Last but not least, if you’re lucky enough to have equity tied up in your home, then you may be able to refinance your current deal so you can put the funds towards your renovation project. If you have enough equity in your home to cover the cost, then you can ask your bank to release the funds while spreading the payments throughout your existing mortgage agreement.
If you don’t have enough equity to cover all of the costs, then you can leverage the current equity you have to borrow the extra funds required to complete your project. Both of these options are pretty attractive since the interest rates will usually be lower than taking out a brand new loan, and you won’t need to apply from scratch. Although, the one major drawback is that the total interest cost will be much higher because the length of the loan term is usually a lot longer than a personal/construction loan.
Final word
With Australian home renovation spending hitting all-time highs in 2021, now seems to be a good time as ever to get to work on those home improvement projects that you’ve been putting off. Whether you’re looking to install that dream kitchen, ideal home working space, or even just fixing that leaky roof that’s been nagging you, it’s essential to consider your financing options when planning your project.
In general, if you can afford to pay for the work out of your own pocket then you should strongly consider doing so since you’ll save yourself from getting into debt and paying interest. If that’s not an option, then you can choose between a personal or construction loan to raise funds for the project or even consider refinancing your mortgage if that’s a possibility. Whichever method you choose, make sure you can cover your repayments for the loan’s full term so you don’t find yourself in financial difficulty later down the line.