Aside from buying your home, renovating is likely to be the biggest financial commitment you will make in your lifetime.
As we have explained in other articles, the benefits of renovating can make this investment extremely worthwhile as you increase the value of your home as well as making sure that it better suits your family’s needs.
However, the different ways of financing your renovation can have a big effect on the actual final cost once you take into account things like the cost of borrowing.
There are now some compelling reasons why the first option you should look at when raising the funds for your renovation is to refinance your home loan.
Switching Loans Now Easier
Back in July 2011, the Federal Government scrapped home loan exit fees for contracts signed after that date. The aim was to help consumers take advantage of competition between lenders by making it less costly to switch home loans.
And there have been even more recent government reforms to put the power back in the hands of homeowners.
In August 2019, the Consumer Data Right (CDR) legislation was passed in the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
This reform means that homeowners can more easily share their banking data with a new lender, which in turn allows them to switch home loans more quickly.
The new lenders can now access a potential customer’s financial data directly when making decisions about whether they will offer a loan.
Finally, new lending laws introduced in March 2021 relaxed some of the restraints placed on lenders imposed in 2009 after the Global Financial Crisis.
The idea behind these new laws is to reduce the verification burden on lenders – cutting red tape to make sure credit is more easily accessed.
Advantages of Refinancing
There are three key advantages to refinancing your home loan:
- As loans go, a mortgage is almost always the lowest interest rate you can find when compared to other types of loans. Because a mortgage is secured against your home – and your home’s value will in the long term likely go up – the risk to banks is comparably low enabling them to offer lower rates.
- You should be able to borrow more than you currently owe, placing the excess funds in either an offset account ready to use when you renovate, or as an extra payment into your home loan, ready to redraw when you need it. This is partly because your home has likely increased in value since you originally took out your mortgage, and partly because a bank can agree to loan you more as long as they are confident you can meet any additional repayments.
- When you refinance your loan, you are able to see if there are other lenders in the market offering a lower rate than you are currently paying. In recent years, because of the various reforms mentioned above, as well as the introduction of things like online-only loans that reduce the cost of banking, you may be surprised how big the reduction in your interest rate will be.
Costs of Refinancing
With the removal of exit fees, most home loans can be ended early without any additional costs.
This might not be the case if you have fixed all or part of your loan. If that is the case, depending on the fee charged, it might be best to wait until the end of the fixed period unless you calculate that you will offset this cost via a lower rate from another lender.
The other costs involved are the establishment fees you might be required to pay by your new lender. Again, shopping around means you can find a deal where the new lender not only pays for all or some of these fees, they will also offer you a ‘cashback’ incentive.
At time of publishing, some banks are offering cashback of up to $4,000 to refinance with them. Again, make sure you calculate the total cost as some of these cashback offers come with higher interest rates so, in the long term, you actually pay more.
The other ‘cost’ of refinancing is your time. Choosing another lender takes time to research, and then time to pull together all the documents they will require – for example, proof of income and credit card statements.
If you have moved to a new financial institution for your banking as well as your home loan, you will also have to give the details of your new bank account to anyone paying into your old account, for example your employer. You will also have to re-set up things like direct debits.
Things to Watch Out For
If you are refinancing your mortgage, start off by finding out how much equity you have in your home.
If you refinance without at least 20% equity in your home, it is highly likely that you will have to pay mortgage insurance.
Alternatives to Refinancing
The main alternative to refinancing is to approach your existing lender asking them to match the deals you are being offered by their competitors. This comes with many of the benefits without some of the costs of changing.
Your existing lender may be prepared to offer you a better rate and extend the amount of the loan (often referred to as a second mortgage or home equity loan) so that you have the funds to pay for the renovation.
If they do the latter, you will likely have to go through some of the paperwork as you would with a new lender, and maybe some application fees, however, you will save the time ‘cost’ of switching and having to inform people about your new banking details.
Other alternatives are most commonly taking out a personal loan or a personal line of credit.
A personal loan offers you access to a specific amount of money at a fixed or variable interest rate, over an agreed period of time, usually one and five years.
You often don’t have to pay any establishment or application fee, but the loan interest rate is usually substantially higher than a typical mortgage rate.
A personal line of credit gives you access to funds that can be used at any time, up to an approved limit. You will only pay interest on the funds you’ve used.
If you keep making regular payments off your balance, you can re-borrow the unused funds at a later time, without reapplying for approval.
However, the interest rate charged for this convenience may be higher than other forms of credit.
About to Renovate?
If you are looking to renovate and want further advice, Addbuild is Sydney’s leading builder of home additions and extensions, with more than 40 years experience and nearly 2000 projects completed.
We offer a ‘concept-to-completion‘ service that includes experienced designers and the management of the Development Application process on your behalf.
Call our office on (02) 8765 1555 or send us a message using our contact form if outside of office hours.
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