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Budgeting for a Renovation

If you've decided that your home is in need of a renovation to bring it up to date or bring functionality to the targeted spaces, you've probably started to look into budgeting your project. Renos have gained a reputation for being expensive, lengthy and interrupting the lives of families who are trying to live in their homes while they are being renovated, but ample planning can prevent the experience from becoming a negative one for you. Here are some tips you can follow to be smart about budgeting for a renovation and funding it.

Stay on Schedule to Stay on Budget

Delays in your project mean that you'll end up paying interest on your debt for longer, and you'll also be dealing with the headache of having limited access to your home during the build. Stick with licensed contractors with a reputation for completing work in a timely manner.

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Fixed vs. Variable Reno Loans

When you go to your bank to request a loan to fund your build, you'll probably have to choose between loans with fixed interest rate or variable interest rates.

Fixed approach - A fixed-rate loan means that the interest rate will stay the same over the entire life of the loan, making it easy for you to determine how much you will be paying each month.  If market interest rates rise you will still be paying your lower rate, but if market interest rates fall you will not benefit from the lower rates.  Fixing the rate gives you greater certainty for planning ahead.

Variable approach - A variable-rate loan payment fluctuates with changing interest rates, and the exact interest you pay from one month to the next depends on the market rate. If you're borrowing when interest rates are historically high, variable interest could save you money in the future if the interest rates fall.  Keeping the rate variable means you are paying interest in line with the fair market rates - and is a good option if you believe rates are likely to fall over the period of your loan.

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Avoid Borrowing Too Much

While you want to work a cushion into your budget in case of unexpected expenses, be sure that you do not borrow more than you really need for the renovation. Keep in mind that fees and interest will be charged on the total amount you owe, so keeping this amount in check is important.

Some lenders have options that allow you a to borrow up to a total amount but only charge you interest on what you draw down.  You might consider such a loan facility to allow for your cushion in case you need it, but ensure you understand if you are incurring fees on the total facility amount.

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Using Your Existing Home Loan

If you already have a home loan, you might be able to use that facility to fund your renovation project.  This can be done by tapping into the equity in your home by increasing or refinancing your current loan. Your loan might need a restructure to enable this, but if you believe your home has increased in value since you took out the original loan, it should be simple to do this.  This option is certainly the easiest one in terms of approval time (especially if you stay with your current lender) and understanding what is expected of you in terms of repayments. Most lenders will allow you to borrow up to 80% of the value of your home as a matter of course, assuming you can afford to. For example, someone who owes $250,000 on a property valued at $400,000 would be able to borrow an additional $70,000 without the need to pay for lenders mortgage insurance.  An additional cost might apply if you wish to borrow more than 80% of the property's value - you can borrow more but it costs you more. Your mortgage broker can explain how this all works and compare the costs so you get the result that best suits your needs.

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