If you’re thinking about renovating, the first step should be getting your finances together.
Refinancing is essentially replacing your old mortgage with a new one. This doesn’t mean your debt is erased (we wish!) but you can package your loan into a better deal to meet your current needs. If you’ve already bought a home and are paying off a mortgage, your next big spend — such as a new car or a renovation — can provide the best opportunity to review your finances and ensure you’re getting the best deal.
Refinancing can help you reap the benefits of the latest mortgage and credit products, from lower interest rates to more personalised features.
We spoke to the experts at Newcastle Permanent Building Society to get some straight-shooting, customer-focused advice for financing your renovation.
1. Why should I refinance before renovating?
Renovating tends to cost tens or hundreds of thousands of dollars, which means you’ll most likely have to chip into your existing mortgage or take out a new loan to cover the cost. Refinancing at this time means you can get the money needed at a better rate.
“It’s a good way to obtain the extra funds you need to complete your renovations at a cheaper interest rate than say a personal loan,” Newcastle Permanent head of customer lending Greg Hooper says.
“Also, customers might be able to take advantage of more competitive rates than what they are on with their current financial institution. Plus, [they could] take advantage of cashback offers that might apply when refinancing.”
2. What is involved in refinancing?
Refinancing isn’t as complicated as you may think and can be similar to any loan application — or potentially less so.
The first step is to do some research and contact some reputable lenders who will let you know your best approach. Newcastle Permanent was recently awarded Best Bank in Australia by Forbes magazine and is a customer-owned mutual bank, meaning it doesn’t answer to shareholders. With customers at the forefront, they can answer your questions to help you decide what’s best for your personal finances.
“We have prompt turnaround times from submission of application to outcomes of generally 24 to 48 business hours,” Hooper says. “The whole process from application to settlement can be on average between two to three weeks.”
3. Do I need to combine all my finances with one lender?
Not necessarily, but choosing one lender for your home loan and banking is generally more straightforward as it simplifies your finances and there are often incentives to do so.
“If you have all your lending with one institution, it can make it simpler and easier to borrow additional funds using the equity in your assets,” Hooper suggests.
“Using the equity in your property to fund major purchases, such as cars, caravans, renovations and so on, will likely mean a lower rate than a personal loan.
“You’ll also have the one lending manager to assist you with your financial needs under the one roof, which can makes things much smoother and easier for customers.”
4. What are some loan features to look out for?
When renovating, you’ll most likely want a loan product that allows you to access funds quickly and easily in order to pay all those contractors, tradespeople, suppliers and so on.
“Offset and redraw facilities are perfect product features when renovating,” Hooper explains. “This gives you the advantage of saving money on interest during this time. All these features can be linked to your internet banking, so it’s easy to move the money around between accounts and to pay the bills.”
He adds that you’ll want to speak with your lender before and after the renovation to find out which solutions are best for your needs and budget.
5. Does everyone need to refinance when renovating?
Not at all. There are many avenues to take and the best one will depend on your personal finances. There may be costs involved, including break costs if you have a fixed rate home loan, so it depends if you can reap the long term benefits of this step.
“When refinancing with intention to renovate, it is important to be mindful of your loan to value ratio (LVR),” Hooper says.
“Lenders Mortgage Insurance (LMI) may apply and it is beneficial to avoid that where possible, or take the additional cost into consideration. You would also need to ensure your new lender is able to facilitate the increase in additional funds and that your income is sufficient to qualify.
“If you can achieve your goal with your current lender and you are happy with your experience then you possibly wouldn’t refinance.”
Having said that, the goal is to get the best deal for you financially and when taking on a new significant monetary burden — like a renovation — refinancing can make a lot of sense long term. Best chat to some trusted banks to find out what’s best for you.
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