Are you an investor or DIY-inclined home buyer that has purchase a rundown property to return it to its former glory?
Discover how to qualify for a renovation loan
How much can you borrow?
- Minor renovations with a licensed builder: You can typically borrow 95% of the purchase price plus the cost of renovations for cosmetic renovations.
- Minor renovations with no builder: You can usually borrow up to 90% of the purchase price plus the cost of renovations.
- Major renovations: You can usually borrow up to 80% unless you have a contract builder, in which case you can borrow 95% of the purchase price plus the cost of the renovations.
- Knock down / rebuild: You can normally borrow up to 90% of the land value or 95% of the total cost of the land plus construction costs with a licensed builder.
- Knock down / rebuild with no builder: You can borrow up to 60% of the cost of the land and the renovations if you’re doing it yourself.
- No intention to renovate: You can usually borrow up to 80% of the property value depending on the location and condition of the property.
- Low doc: You can borrow up to 80% of the purchase price plus the cost of construction.
- Borrow 105% of the property value: If your parents can act as a guarantor, you can borrow the full purchase amount including the costs of completion.
- Discounts: Competitive professional package and basic loan discounts are available.
Call us on 1300 889 743 or complete our free assessment form and we can let you know how much you can borrow for a renovation loan.
Will the loan be paid in stages like construction finance?
If it’s a small job, for example less than $30,000, the bank will usually pay the contractor or builder only upon completion.
This may cause problems as the builder may want a deposit upfront.
It’s best to discuss this with the bank during the approval phase.
For larger jobs, the banks will normally want progress payments to be made and a valuer to check the work at the end to confirm it is complete.
When should I apply for the renovation loan?
Banks can take their time in approving your loan so it’s best to apply well in advance to avoid disappointment and stress.
If you have lots of equity in your property, you can release equity (loan top-up) in a week or two.
If you have very little equity or you’re relying on the final property valuation, allow for six weeks or more.
Why are banks so conservative?
Banks hate unfinished renovations
Most lenders restrict the amount you can borrow quite significantly if the property is in a bad condition.
The major concern they have is if you leave the renovations half finished or you don’t use the funds to renovate the property at all.
For a finished home, the bank has recourse to forcibly sell if you are unable to make your mortgage repayments – unfinished properties are much more difficult to sell.
If the property could be leased in its current condition and has a working kitchen and bathroom then normal lending rules will typically apply.
In these cases, you can borrow up to 100% of the property value with a normal loan or 80% with a low doc loan.
Most banks prefer licensed builders
Most lenders will decline your loan unless you use a licensed builder to repair or renovate your property.
The reason is that licensed builders are required to carry Home Warranty Insurance which reduces the bank’s level of risk.
In the banks’ experience, people who undertake DIY work do not have Home Warranty Insurance (Home Building Compensation Fund (HBCF) insurance).
They also tend not to complete the renovation work to a high standard and take time off work to get it done.
Overall, the project takes longer to complete.
What are the benefits of renovating?
It can often be less expensive to buy an existing dwelling that requires renovation than buying a property that is ready to move in.
Renovating can also provide you with the opportunity to custom design aspects of your house or, for an investment property, make capital improvements that will improve the value of the property.
Who takes out renovation loans?
Typically it’s home buyers not investors that apply for renovation finance.
Some people want to do this right away but they don’t have enough equity in their home.
This is typically true if you’ve borrowed at 95% of the property value.
If have a licenced builder then the bank may be able to rely on the end valuation so you can borrow more.
If you use contractors or do the work yourself then you cannot use the increase in your home’s value to fund the renovation.
So you either need a lot of equity, a guarantor loan (only some lenders can do this) or a personal loan.
Popular types of renovations
- Cosmetic: New paint, floor coverings and gardens can give you the biggest bang for your buck. You get a home that looks totally different without much work, time or money.
- Kitchens and bathrooms: These two rooms are typically the ones that need the most updating. By putting in a new kitchen and bathroom, you can vastly improve the quality of your home.
- Installing a pool: A swimming pool can add value in some locations, for example Queensland, where the weather permits use of a pool for much of the year.
- Structural renovations: Knocking down walls and rearranging rooms is quite difficult and expensive. You should only do this if there are limitations that prevent undertaking certain work.
- Extension: This includes adding an extra level or extending your home. Just make sure that you get council approval first!
Risks involved in renovating
All too often people start a renovation project only to run out of funds half way through.
Often, they will approach their bank for a loan extension but will be declined.
They will then go with a non-conforming lender that will allow them to borrow but charge them an exorbitant interest rate to do so.
It’s best to fill in our free assessment form or speak to one of our expert mortgage brokers on 1300 889 743 so they can assist you in applying to ensure that you maximise your chances of approval.
Tips for renovating
If you’re thinking of borrowing to renovate, here are some simple things you can do to ensure that the renovation goes smoothly:
- Look for properties in solid growth markets that are being sold below market value and only require minor repairs.
- Make sure that you get Development Application (DA) approval or check with your local council before undertaking either major or minor construction work.
- If you’re renovating to sell in the near future (property flipping), focus on repairs and makeovers that will actually increase the property value, such as bathrooms and kitchens.
- Speak with your mortgage broker before you purchase your “fixer-upper” or start renovation work on your home – the last thing you want to do is run out of funds halfway through the repairs only to find that a lender is unable to approve your application.
Apply for a renovation mortgage
Our mortgage brokers are experts in all types of construction loans, including home loans to renovate an existing home.
Please call us on 1300 899 743 or complete our free assessment form and we will go through your options with you.