With renovating, you can keep your current house and change it to match what you need – without giving up the location that means so much to you. Here are some options you may want to investigate:
Financing the renovation with a personal loan
Personal loans come in varying categories. While they are most often connected with a new car or vacation, personal loans can also be used for something less grandiose- yet still practical like home renovations if your total spending is beneath $50,000. Unsecured personal loans usually have a lower interest rate than credit cards. Also, personal loans typically last for only three to five years whereas home loans can last 20 to 30 years.
- Faster approval process than mortgage-based financing
- Fixed interest rates and repayment terms (usually 1-7 years)
- No property valuation or security required for unsecured loans
So, with personal loans you end up paying less in interest overall. Additionally, the interest rates on personal loans are often fixed for the entire length of the loan. If you’re comfortable with a little bit of change and aren’t interested in breaking the bank, consider using a low-interest credit card when financing your renovation.
This is especially convenient if you plan on buying materials through an online or phone retailer. However, as with any other credit card purchases, it’s important to manage expenses carefully and strive to pay off the debt quickly to minimize interest costs.
Using your home equity
Tapping into your home’s equity is often one of the most cost-effective ways to finance a renovation:
- You can borrow against the equity you’ve built up in your home over time
- Generally offers lower interest rates compared to personal loans or credit cards
- The amount you can borrow depends on your home’s value and outstanding mortgage balance
- Interest may be tax deductible if the renovation increases your home’s value
However, you’ll need to have sufficient equity available and be comfortable increasing your mortgage debt.
Financing with a mortgage surplus
If you have surplus money after paying your mortgage and if your mortgage plan permits, then you can access this money for home renovations. However, be mindful that redrawing from extra repayments means losing the benefit of reduced interest charges on your mortgage because it will increase the principal amount owed. Keep in mind that your lender may charge fees for refinancing and increasing your mortgage.
Also, a bigger mortgage usually comes with increased loan repayments and/or longer repayment terms.
Be mindful that you might need to pay fees from your mortgage before refinancing, on top of the new application fee. What makes sense for you depends on various factors, so be sure to assess all pros and cons thoroughly before making a decision.
