What to Consider Before Applying For a Home Renovation Loan
So you've decided to give your home some TLC with a renovation. Whether your plans include a new bathroom, kitchen or a whole new extension, you'll probably need to borrow money toturn your home renovation dreams into reality. Before you go knocking down walls then, consider these financing options.
Using your savings
If you have some money put aside, or hold investments you can cash in, it's probably tempting to simply use your savings to finance your renovations. After all, it's your money and it appears less financially risky than borrowing. Taking a short term view, it seems like the right thing to do, but eating into your savings can be a little unsafe. It's always a good idea to have extra cash aside for the inevitable emergencies life likes to throw our way. It could be a car service, a broken fridge or an insurance excess; either way, it's shrewd to have something put aside for a rainy day.
If your exciting new renovation is likely to take away all your savings, then a personal loan might be a wiser option. A home renovation loan with low rates is a good way to save money on fees and interest.
Refinancing and home equity loans.
So what about a home equity loan? With low mortgage interest rates, it's another tempting option when it comes to renovating your home. Because they are often such large loans, you might not notice the increased repayments of say an extra $25,000, especially if you're spreading them out over the 15 or 20 years left on your mortgage.
However, that doesn't mean they won't have a big impact on your wallet. In fact, when you start adding up the extra monthly sum and multiply it by the time left on your mortgage, you'll probably find that you're spending a lot more than if you'd opted for a renovation loan.
For example, if you spread the $25,000 you've taken out for your renovation over the next 15 years left on your mortgage, with a standard variable home loan rate of 4.93% p.a., you're looking at an extra $10,422 in interest repayments. Comparing that to a home renovation loan of $25,000 paid back over 5 years at a fixed rate of 8.4% p.a., you could save almost $4,000 in interest and fees.*
Renovating or repairing your little castle can be an exciting but sometimes stressful exercise. Having a clear project plan that allows for contingencies is a must. That's why it's worth taking the time to figure out how you're going to pay for your project.
If you're looking at a renovation between $5,000 and $50,000, a personal home renovation loan is a great way for you to achieve your renovation goals. A home renovation loan ensures you aren't burdened with increased payments for years or even decades to come. Sure, your monthly repayments are likely to be more but that means you're not forking out as much on interest. Better still, with the personal loan paid off, you'll have more freedom to invest in your next big project!
*This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances. *
** Savings comparison assumes no monthly or ongoing fees for either loan. The SocietyOne interest rate is for a borrower with excellent credit (Tier 1 borrower). Amount saved with a SocietyOne loan includes a $750 establishment fee. Interest savings are $4,719 less $750 establishment fee = $3,969 total saving.*
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