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Most people want to remodel the house they live in at one point or another. There could be many reasons to renovate a house – you may have added a family member or require a dedicated place to work from home after the pandemic. Many homeowners are also taking up home renovation to cash in on the rising property wave. Small changes can fetch big money, especially in uptown areas.

 

Renovations cost money

Whether you plan to build a home office, knock off a wall to create an open plan kitchen or retile your bathroom for a fresh look, the question is how you are going to fund the renovations?

The first place to look for money to pay for your renovation project is your savings. But what if you don’t have any cash in hand. There are still a bunch of options for you to explore, such as a personal loan or turning to your home loan for help.

 

Using your home loan to pay for your renovations

When it comes to your home loan, you generally have two options to choose from. The first option is using a redraw facility to withdraw any additional payments you may have made into your home loan account and use this money to pay for renovations. However, not every lender will allow this, and it may or may not be an option for you. It’s also worth knowing that redrawing any additional contributions from your home loan will prevent you from paying it off early and increase the amount of interest you pay over the term compared to the situation had you left the additional contributions untouched. 

The other option is cashing out the equity you have built into your home by refinancing your home loan.

Equity refers to the difference between the current value of your home and the amount you owe on your home loan. Considering that property prices have been rising in many states in Australia, your equity may be more than what you have repaid on your home loan. Here’s an example to help you calculate the equity in your home.

Suppose you bought a home for $600,000 a few years back, and its current value, according to you, is $750,000. Assuming you owe $350,000 on your home loan, your current equity in the home would be $400,000. However, this does not mean that the entire amount is available for you to borrow. Most lenders would allow you to borrow up to 80% of the total equity. Also, the lender would send a valuer to ascertain the market value of your property, which may not exactly match up with your estimate.

Whether or not it’s a good idea to use the equity in your property depends on how you plan your finances. A loan against equity can offer you lower interest rates than an unsecured loan, such as using your credit card or taking out a personal loan. Also, if you are making value additions, your home’s equity will increase as a result of well thought out renovations. On the flip side, cashing out your equity will increase your home loan balance. The size of your monthly repayments will thus increase if you continue with the same loan term. Alternatively, you may increase the term of your loan, but you’ll end up paying more in interest by stretching your mortgage over a longer duration. 

If you have queries around a home loan product or want to learn more about using your home equity, it could help to speak with a broker or ask a Hashching expert for their opinion.

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