Financing Your Home Renovation
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Home renovation is something of a Kiwi obsession! For many of us, the idea of ‘doing up' a house to realise its potential, or to suit family needs has huge appeal. Renovating rather than building from scratch is also often the only option in established communities where vacant sections are rarely available. In some cases if you intend renovating immediately, the cost of renovation can be included in your initial home loan application. Typically however, the initial cost of purchasing your home means that renovations are put on the back burner for a few years. This is not at all a bad thing for two reasons. Firstly, living in a home for some time is always a good idea before you plan substantial alterations. It can take some time and reshuffling of rooms to work out how a home works (or doesn't work) for your family – and exactly what the alteration needs to provide. Secondly, after living in your home for a few years, you may well have increased the equity in your home due to mortgage repayments or rising property values. That certainly makes it easier for the bank to say yes to renovation finance, but remember that just because you have equity in your home it doesn't necessarily mean that you can afford increased monthly repayments of an additional loan. How much will banks lend? The simple answer is ‘It all depends'. As with home loans to buy or build, the amount that any bank or financial institution is prepared to lend for renovations will depend on two factors; your ability to service the mortgage and the value of the house. If you are making regular mortgage repayments, the bank will look carefully at how you will be covering the increased mortgage costs. On the other hand, if your home loan is a ‘revolving credit' type loan, such as the ASB's Orbit Home Loan, you may not even need to reapply to the bank. Instead you simply draw down the money as you need it – up to your available credit limit. For example, if you were originally approved for a $300,000 loan, and you have paid $60,000 of that off over three years, you can, at any time, draw that $60,000 down again to use for whatever you wish. However, if your equity or approved lending limit is less than the cost of the renovations, the bank will certainly look more closely at what value the renovation will add to the house and will lend accordingly. What is involved? Typically, the first step is to sit down with one of your bank's Home Loan Advisors, to discuss your plans and mortgage requirements. Essentially, the banks need to ensure that the renovation is going to add enough value to your home so that in the event of you defaulting on your mortgage, their money can be recouped. Kiwi Bank, for example, requires that plans are permitted and fully costed – preferably on a fixed price contract. Then a registered valuation is carried out on the house as it is, and as it will be when the new work is completed. At Kiwi Bank, when a loan is approved, it is then drawn down progressively as the work is completed and subsequent valuations are often carried out. The draw downs are made on an interest-only basis until the work is fully completed, then the client and one of the bank's Home Loan Advisors sit down and work out the best loan plan. Things to avoid:
And the most important thing to remember when you're renovating is ‘You have to live through it!' If you don't think you're going to cope with the dust and disruption you'd better budget for a motel! Read more articles related to this story...
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