Many investors or more DIY inclined home buyers like to buy rundown properties and restore them to their former glory.
You can usually get a great price because the bad condition requires extensive repairs before the property can be liveable, which puts off many other buyers.
How do you qualify for a renovation loan?
Borrowing from the banks
Financing these properties can be more difficult because the banks are concerned that if you leave the renovations half finished or if you don’t renovate at all then they would have trouble selling the property in the event that you didn’t repay the loan.
So how can you finance your renovation project?
How much can you borrow?
No intention to renovate: You can usually borrow up to 80% of the property value depending on the location and condition of the property.
Minor renovations required: You can usually borrow up to 90% of the property value, depending on the nature of the renovations required. As a general rule, cosmetic renovations are fine. If you are hiring a builder then you can borrow 95% of the cost of the property plus the cost of the renovations.
Major renovations required: You can usually borrow up to 80% of the value of the property unless you have a contract builder, in which case you can borrow 95% of the cost of the property plus the cost of the renovations.
Knock down / rebuild: Normally the property would be valued as the land value less the cost of knocking down the old house. You can normally borrow up to 90% of the land value alone or 95% of the total cost of the land plus construction costs if you have a licensed builder.
No licensed builder: You can borrow up to 60% of the cost of the land and the renovations if you are doing it yourself.
Low doc: You can borrow up to 80% of the purchase price plus the cost of construction. Some more conservative lenders may limit your loan to 60% of the property value. Because lenders are very strict with this type of lending, all low doc renovation loans are assessed on a case by case basis.
Note: Most lenders restrict the amount you can borrow quite significantly if the property is in a bad condition. Renovation loans are assessed by different banks in very different ways so please call us on 1800 889 743 or complete our free assessment form to find out how much you may be able to borrow.
A good rule of thumb
If the property could be leased in its current condition and has a working kitchen & bathroom then, as a general rule, normal lending rules 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.
Why are the banks so conservative?
Most banks have had all sorts of trouble with renovations going wrong, in particular when a licensed builder isn’t used. For this reason, most lenders will decline your loan unless you use a licensed builder to repair or renovate your property.
In addition to this, it’s very difficult to sell a property if it isn’t complete or requires major repairs. Properties that may take a long time to sell are a higher risk to the lender in the event that you cannot repay the loan.
Why do banks prefer a contract builder?
Licensed builders are required to carry Home Warranty Insurance, reducing the bank’s level of risk.
People who complete the work themselves as a D-I-Y job tend not to complete it to a high standard.
In some cases, there can be serious defects which can be a safety hazard.
In addition to this, people who complete the work themselves don’t take time off work so it can take a long time to complete the renovation.
The quality of the work and the time it can take to complete are big red flags to the bank.
Banks cannot rely on the proposed value of the property after the renovation is complete if they can’t trust your track record as a builder.
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 do an easy increase in a week or two.
If you have very little equity or you’re relying on the final valuation, allow for six weeks or more.
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.
It can often be less expensive to buy an existing dwelling that requires renovation, rather 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 such as fit out, accessories, fixtures and other structural elements of the house.
When taking on a renovation project it’s important to be realistic about what you want to achieve through the renovation and how much this will cost.
Although many people want to add value to their new homes by installing new features and top of the range appliances and fixtures, if this isn’t in your immediate budget, it’s better to settle for something more reasonable.
Renovating a property can take some time and often there are more unforeseen expenses when you get into the project. For this reason, planning and sticking to that plan is essential.
Who takes out a renovation loan?
Typically it’s home buyers not investors 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 if you’ve borrowed at 95% of the property value.
If have a licenced builder then may be able to rely on the end valuation and 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 vastly improve the quality of your home.
- Installing a pool: A swimming pool can add value in some areas and states such as 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 with the current design that prevent you from using your home the way that you want.
- Extension: This includes adding to your home with an extra level or extending your home into the backyard. Make sure that you get council approval first!
Risk 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 lender for a loan extension, but where they’re unsuccessful they have to go to a different non-conforming lender who will allow them to borrow, but charge exorbitant interest rates. The loan can be so large that selling the property once completed, is the only option available.
If the property requires a lot of work, it may be harder to get a loan. However, 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, some general things to remember will ensure that the renovation goes smoothly:
- You can still find some properties that will sell cheaper and only require minor repairs. This will save you money and will still add value to the property.
- Make sure that you get planning permission or check with your local council about requirements if you plan to make large structural changes to the property.
- If you’re renovating to sell in the near future, you want to think about adding in additional extras that will increase value to your house, but without large costs, such as quality flooring and appliances.
- Organise your finances and make sure you have a buffer in case anything goes wrong or you need for funds.
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.