A home renovation can create a dream house for you to live in or add value to a property before selling it – à la the popular show ‘Love It or List It’.
Adding value isn’t 100% guaranteed though and experts warn of making sure you don’t over capitalise - by spending too much on a renovation that doesn’t add enough value to the property.
So, how can you finance a renovation and how do you make sure it’s worth it?
REDnews spoke to Westpac NZ Construction Lending Specialist Francis Reade to find out the ins and outs of financing a renovation and when it’s a good idea to renovate.
The ins and outs of renovation loans
There are two ways of having the loan financed – depending on how much equity you have in your existing home.
“If your property is valued at $1 million and you owe $400,000 on the mortgage, then you have a lot of equity.
“In that case the bank would give you an overdraft-type of facility that has a mortgage interest rate and you spend it when you want to, providing there is no major structural alterations to the existing home,” Reade says.
“If you don’t have a lot of equity then the bank would control the loan. The customer would send the bank a copy of the contract and invoices for the renovation and the bank would approve the loan and pay the invoice directly to the contractor when required.
“In this instance, the bank would let the customer know the pre-approval amount they are willing to lend them,” he said.
Renovation loans can cover a wide range of home improvements including driveways, extensions, landscaping, basic spruce ups like painting and floor coverings, swimming pools and more.
If the aim of the renovation is to upgrade the property’s ‘healthy home’ standards by adding features such as ventilation, heat pumps or insulation, then Westpac customers could qualify for the Westpac Warm Up loan of up to $10,000 interest free for five years.
What are New Zealanders spending on renovations?
Francis Reade says the average renovation loan is around $50,000.
“Cosmetic tidy ups could cost as little as $5,000 and some customers apply for much larger loans, up to $1 million, so there is a huge variance.
“Owners of a $10 million house in Remuera with a lot of equity could apply for $1 million for renovations,” he said.
Reade says that when you have an idea of what you want done, and what the renovation will cost, get a loan pre-approval.
Once the finance is unconditionally approved, then get the council consent and building consent if required.
Reade says the most popular reasons for renovation include: Cosmetic tidy ups before selling, sprucing up the garden, upgrading the kitchen, building an extension for a growing family, building an outdoor living area for entertaining, adding an extra room for a home business and building a minor dwelling to rent it out.
What other loans will impact your renovation loan?
“All existing loans and debts, including credit cards, personal loans, store cards and student loans will come into play when a bank assesses your loan,” Reade says.
“The bank will also assess your income stream and what comes out of that pool to cover living costs and debt costs. This would also include a buffer in case interest rates rise in the future.
“As long as there is a surplus, the bank would approve a loan, but they cannot approve a loan if there is no surplus,” he said.
Anyone wanting to apply for a renovation loan should speak to a banking consultant in their local branch and enquire about topping up the existing mortgage.
Low interest rates and over capitalising
We’ve all heard in 2020 that interest rates have hit record lows and the housing market is booming because of it, so how does this impact renovations?
Because renovation loans come under the same product as home loans, it means they qualify for the same interest rate as your mortgage.
This means it could be a great, affordable time to undergo that renovation you’ve been dreaming about.
However, the caveat is that you need to be careful to not over capitalise, as the lending specialist explains.
“If you live in a house with a maximum price value of $500,000 and you spend $100,000 on renovations, you might not get it back when you sell.
“This would happen if you live in a neighborhood where the prices of neighboring houses don’t have a value above $500,000 for the same style of property.
“You need to compare your house with the other houses in the neighborhood, with the same number of bedrooms,” Francis Reade says.
“Make sure you get a registered valuer to appraise the property as it is and show them the plans to see what the renovation would add to its value.
“The other thing to consider is that when you sell a house, you would be paying real estate fees and legal fees, so another option would be to spend that money improving the house and continue living in it,” he says.