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How should you finance a renovation?

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By Lyndsey Douglas

Real estate can be a great part of a wealth management strategy, and renovations can add excellent value. But how should you fund one?

Property is a good asset class for growing your wealth, as long as it is done right. You need to be smart with your property investments, and pick an area with sustainable growth – balancing affordability. Capital growth might be appealing in the Eastern Suburbs of Sydney, but not everyone can afford the millions it could take to buy property there.

On top of this, you have the added issue of capital gains slowing down at the moment. A January 2016 value index from CoreLogic RP Data indicated that Sydney's growth was nearly half what it was a year before, while Melbourne was also a shade of its former self.

When this occurs, one way people add value to their real estate is by renovating or making additions to it. But how should you fund this?

Out of your own pocket

In some cases, you'll be able to fund a kitchen renovation all on your own. After all, research from the Australian Securities and Investments Commission indicates that 88 per cent of respondents were able to save money. If you can put together enough over time, you might not need to find any other kind of finance when it comes to making additions to your home. A few congratulations would be in order for some excellent financial planning, as well!

However, many people can't do this, and must look to other financing options. 

Accessing equity

As you pay off a home loan, you will be building up equity in your real estate. This is essentially the difference between the value of a property, and how much you still owe the bank. So if your home was worth $600,000 and you had paid off $100,000 of a $480,000 loan (80 per cent of the home's value), then you would have $220,000 of equity, more or less. 

Remember that accessing equity to fund a renovation is borrowing more money.

However, remember that accessing equity to fund a renovation is borrowing more money - you still need to pay it back. Professional financial advice might be essential for working out how much equity you could use to do over that bathroom! 

Refinancing

This is a method in which you essentially re-write your home loan, signing a new contract and expanding on how much you can borrow. It can be very useful for conducting renovations, especially when it comes to kitchens and bathrooms, which Archicentre estimate can cost up to $30,000 to fit out. 

At the same time, you may have the chance to lock onto a lower fixed rate, or to switch to a variable rate home loan. This can be dangerous though, as there are costs involved in setting up a new loan and you may be worse off! 

Additional lending

With some of the same risks as refinancing (namely, increased payments and potentially a longer term), taking out an additional loan might not be the best option for your wealth management. However, for those who can, there are certain benefits to using a construction loan.

This includes staggered payments, where you borrow to cover invoices as they come in. It means you don't pay the full amount of interest right off the bat, and lets you ease into the full costs. It will often come with a variable rate though, so make sure to pay attention to the wider interest landscape.

Making renovations can be akin to taking your home's value into your own hands - if you do it right. There is always the risk of overcapitalising, where you make renovations that don't actually add value, and also the danger of borrowing more than you can repay.

Here at Yellow Brick Road, our local representatives can assess your finances and help you tailor a wealth management strategy that suits you uniquely. Get in touch to find out more.

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