Renovating your home is an exciting time. With so much to look forward to, and so many decisions to make, it’s important to take the time to focus on the financial side of renovating. Here are five costly mistakes to avoid when planning your renovation budget, to help your renovation run as smoothly as possible.
1. Don’t over capitalise
Renovating key rooms such as your kitchen and bathrooms, extending your entertainment area or adding an extra bedroom can all add value to your home. Knowing exactly how much value your renovation will add to your property can be hard to predict.
Before you start your renovation, it is important to do as much research as you can to make sure you don’t improve your property beyond its resale value. Speak with a real estate agent to get an idea of local property prices, and consider that in your renovation plans.
2. Avoid restricting your loan options
There are several kinds of home loans on the market today that are suitable for financing renovations. The two most popular are variable and fixed-rate mortgages. A variable mortgage means your interest rate can increase or decrease over the life of the loan. A fixed-rate loan means your interest rate will be fixed for an agreed period of time, usually between one and 10 years. Both have their benefits, and both may be suitable.
You may also be able to split your loan into both fixed and variable sections. The other kind of loan that may be suitable for you is a construction loan. These mortgages allow you to stagger payments to builders as agreed stages of construction are completed. The key benefit of a construction loan is you will only make repayments based on your loan balance on the amount you have paid out.
3. Don’t forget about your equity
Accessing money for your renovation may be a lot closer to home than you think. Using the equity in your house may be the best way to finance your renovation. Equity is the difference between what your home is worth now, and the size of your mortgage. For example, if your home is worth $500,000, and your mortgage is $250,000, you may have up to $250,000 of equity in your home. Using equity to pay for renovations is a popular strategy right across Australia.
4. Don’t dismiss your borrowing power
Understanding your borrowing capacity is a great place to start when you are planning a renovation. Before you draw up any plans, try an online borrowing calculator for an indication of how much you might be able to borrow. Simply enter your income and expenses details, and the kind of loan you are looking for. While you won’t get a loan approval, such tools can give you some scope to start the planning process with.
5. Avoid disappointment by sticking to a budget
No matter which loan you choose to finance your renovation, start with a comprehensive budget, and try to stick to it. Some renovators forget to include fittings and furnishings in their renovation budgets, which can blow out the overall cost significantly. Remember to plan for contingencies – renovations rarely go exactly to plan, so being prepared is important.