Different ways to finance a renovation

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So much so that the HIA predicts more than $35 billion will be spent on renovations during 2019.

That’s an increase of $2 billion compared with 2016, a figure HIA economists predict will help to offset weakening activity in the new home building market.

HSBC Australia head of mortgages, Alice Del Vecchio, says she has already noticed an increase in clients seeking to finance renovations, and describes their decision as a “perfect opportunity” for them to review their existing mortgage.

“I always believe the moment you do something significant in your life, and a substantial renovation is an expensive exercise, you should be having another look at your mortgage,” she says.

“That doesn’t necessarily mean you move banks, but you should have a really good conversation with your relationship manager and explain what you’re looking to do, so they can work out the best solution for you.

“If you feel like you’re not getting the right solutions, then absolutely you should be looking at what other lenders are offering.”

The most common way of financing a renovation is what’s called a “top up” of an existing mortgage, which either extends the loan period or increases the monthly repayments. Often it’s a mixture, depending on the customer’s wishes and ability to pay.

“In some cases, depending on how long they have been paying off their mortgage, it might be possible to provide the extra money needed for a renovation, extend the loan term and actually reduce their monthly repayments,” Del Vecchio says.

“Others might like to pay the loan off faster. It’s just a matter of sitting down with a relationship manager, crunching the numbers, and coming up with a repayment plan that suits you best.

“In fact, clients who have been paying off their mortgage for a long time might not need to borrow money at all. They may be able to simply re-draw any overpayments to the loan they’ve already made.”

Before deciding whether or not to finance a renovation, all banks will get a valuer to assess the property and provide an estimate of its worth at the end of the renovation. Del Vecchio sees this as protection for clients as well as the banks.

“If you’re just updating a bathroom maybe it’s not so significant, but if you’re building a second storey you need to know what the end value of the property will be, after the renovation, so that you – as well as the bank – know if you’re overcapitalising,” she says.

“Most customers like to look at all the options. Let’s say you have a loan that was originally a 30-year term and you’re now down to 20 years. If you’re comfortable with the existing payments, you might like to just top up and extend the loan term.”

This article was originally published on Domain