Get your renovation finance sorted

So the appeal of that ‘vintage bathroom’ you loved when you bought the house has worn off? Ditto your patience with a kitchen the size of a hat box and the fact that you’ve got no storage space. At. All.

Yes, it’s time to renovate, and unless you’re one of the lucky few who has ready access to the required funds for the project, obtaining a renovation loan will be high on your list of priorities. So how do you go about getting one?

Mortgage broker Shaun Curtis from Mortgage Choice says that most commonly a lender will look at the project you’re planning and lend you the funds based on the estimated value of your home once the renovation is complete. ”Effectively, you borrow on the value of your property as if it’s already been renovated,” he says.

He also says the system provides important assurance to homeowners that they are completing a sensible project and adding value to their property.

“If you’re planning a project that’s going to cost a lot but that won’t add the equivalent (or more) value to your home, the bank will knock it back and probably save you from making an expensive mistake,” he says.

Step 1: Decisions

An important first step is to firm up the scope of the project, including how much you want to spend. This may sound self-evident, but it takes time to nut out the scale and nature of a home renovation. Once you’ve decided whether you’re simply adding a third bedroom or remodelling the entire back half of the house, it’s time to have your plans drawn up. “Even a basic floor plan and some idea of the fit-out will enable builders to give you an estimate of cost and the bank to assess the value of your home on completion of the proposed works,” Curtis says. “Some banks will even conduct a valuation on your proposed project before you submit a loan application. This is a good option because it gives you an idea of whether or not you’re going to get the loan, without having to do all the paperwork first.”

Step 2: Fixed-price contract

Curtis says the real key to obtaining renovation loan approval is having a fixed-price contract from your builder before you submit your application. “Most lenders won’t proceed without this document,” he says.

You don’t need the relevant council approvals to obtain a renovation loan; however, the bank won’t make the first payment to the builder unless these have been provided, too.

Step 3: Know what to expect

According to Curtis, many homeowners assume a renovation loan will arrive in their account as a lump sum. “What actually happens is that the bank will make payments directly to your builder upon successful completion of each stage of the renovation,” he says.

Another pitfall to watch out for is assuming your taste in expensive fittings will translate to a strong valuation on the completed project. “You have to watch this,” says Curtis. “While you may love having a top-of-the-line dishwasher and gold-plated taps, these aren’t the things that boost the value of your property.”

For non-structural projects

Another way you can obtain a renovation loan is to access the equity you’ve built up in your home and use these funds to pay for your home improvement. “This kind of loan is less common, simply because most people don’t have enough equity in their property to fully fund the project they are planning,” Curtis says. “In addition, the banks will approve this type of finance only if it’s for non-structural work, such as a new kitchen fit-out. For structural work such as extending or adding a second storey, you need a fixed-price contract.”

Always shop around

Renovations can be expensive, so it’s worth shopping around for the best loan. If you don’t have the time to contact several lenders yourself, a mortgage broker can assist.

With careful planning, sorting out your renovation finance to achieve your home-improvement dreams is fairly straightforward.