Tuesday, September 25, 2018

How To: Finance Your Renovation Project

by EffieHerdman (writer), , February 16, 2016

Renovating your house in order to expand the size can be a smart investment but it’s not always easy when cash flow is tight.

Renovating your house in order to expand the size can be a smart investment but it’s not always easy when cash flow is tight. It is important to explore different options when it comes to financing your renovation project and with a wide range of private and government funding schemes and low interest rates, there’s never been a better time to think about renovating your home. When determining the best borrowing option for you it is important to think about the total material and labour costs of your project, as well as acquiring the right renovation insurance tailored specifically to your project.


Although many people feel that paying in cash is always best, it is not always necessarily the most financially practical way of supporting your renovation project. If you have a large sum of money in a high interest bank account, then you need to investigate whether you would be financially better off leaving the amount in the account to gather interest, in comparison to the cost of an equivalent loan. If you currently have a large sum of money locked into a high interest saver, then you may need to contact your bank to address any penalties you may incur if you were to withdraw your money early.

Bank loan
A bank loan is the most common way to finance a renovation project because you can set simple, fixed repayments from your bank at regular intervals. If your budget allows, try to arrange weekly payments as the repayment total equals the sum of the original loan and accrued interest, so over weekly payments you can reduce this amount much quicker than a single monthly payment, without costing you a penny more.

Credit Card

A main advantage to financing your project through a credit card is the repayment system, which allows you to pay off as much or as little as you’d like to each month without a financial penalty (dependent on credit card terms). If you already have a credit card then you may already have a high enough credit limit without waiting for loan approval. Paying by credit card can provide valuable legal protection if the company you’re buying from goes into liquidation or doesn’t deliver the goods as promised, which means you may be able to claim a refund from the credit card company. However let’s not forget that interest rates are generally much higher through credit cards in comparison to other types of loans, and that not all supplier will accept credit cards for payment. Although some banks offer, what they call, ‘secured’ credit cards with lower interest rate, they may in the long term give you a lowered credit rating which could cause future finical problems.

Home Equity Loan
This option allows you to borrow against the total value of your home minus the cost of your mortgage, therefore this option really only suits homeowners who have already paid off a significant amount of their mortgage. This loan can be a great low-cost option to source funds for your renovation project, however it is important to remember that this type of loan is seen as a second mortgage which unfortunately includes all of the drawbacks, including the very real possibility of foreclosure if you miss a payment.

Unsecured Personal Line of Credit
These popular loans have flexible repayment terms with fixed or variable interest rates depending on the lender, making this type of loan extremely useful for projects with payment installments. An unsecured personal line of credit allows you to borrow a prearranged limit and pay off all or a portion of the balance each month above the minimum. Similarly to a credit card, this does not necessarily charge you for making a higher one-off payment (depending on lender).

Mortgage refinancing
Remortgaging is one of the most popular ways to finance your renovation project as it allows you borrow against up to 80% of your home’s appraised value. This loan allows you to spread the repayments over a long period of time, which is usually at a lower rate than a secured personal line of credit. However, other unseen costs such as legal and appraisal fees and penalties are often a factor which can be overlooked. Make sure you weigh up these fees against the cost of other borrowing options before you commit to a finance arrangement.

About the Writer

EffieHerdman is a writer for BrooWaha. For more information, visit the writer's website.
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