Understanding The Basics Of Home Improvement Loans In Australia

The COVID pandemic made our stay at home considerably more. Homeschooling received a boost. Working from home grew exponentially. Lockdowns confined us within the walls of our homes. Hence it seems quite normal that our awareness and expectations of the functionality of our houses grew.

These days we all want to increase our working space at home. We all need to increase our storage space. We need to enlarge and improve the kids’ study area. We want to make our living rooms more comfortable. 

The dining areas need to “grow”. Even the guest bedroom needs an extra bed for our sleepover friends. The “Houzz and Home Australia” renovation trend survey point to a staggering 54% of the respondents changing the layout of even their kitchens.

How Do We Fund All Of This?

Further to the renovation trend, more and more people realised that they want to buy their homes and make property investments. The increased demand, the low-interest rates, as well as the renovations themselves, have led to a strong appreciation of real-estate prices. This has made it more than easy to receive home renovation loans.

The materials and professional help for these home renovations just for the past 12 months cost us a staggering AUD 4.38 billion worth of loans! Only in August AUD 500 million were withdrawn for repairs and renovation. This marks a 143% increase from last year. Obviously, home renovation loans are in strong demand. However, do we know the basics?

Type Of Loan

Probably the most important thing when considering a home improvement loan is to consider what type of loan fits our finances best. There are numerous financial products from a variety of financial institutions. 

All of them will differ in the accepted collateral (if any), the standard duration of the loan, the intended use, the maximum (and also sometimes minimum) value of the loan, as well as some other additional requirements. Even if the funding will all be used for renovation purposes there exist a variety of home improvement loans to choose from:

• A Green Loan is a loan used to add sustainable amenities to your home. With the whole planet going green, this will probably increase in popularity in the years to come. If you want a renovation to your home and a decreased carbon footprint the Green Loan is the one for you. This being great, this is also its weakness – you cannot use the funds for general renovation. Only a limited list of improvements will be eligible for funding;

• A Mortgage Loan is a loan with your home acting as collateral. Even if you have an existing mortgage loan, the appreciation of real estate prices means that most likely you will be eligible for a re-mortgage against the equity in your home. This will free up cash for remodelling. These are loans that may reach up to AUD 100 000 easily. Hence if you are considering a substantial renovation, this may be the right way to go. Probably the best feature of these loans is their long-term. 

They will easily span for the next 10 to 15 years. Another great feature is that the interest here will be the lowest from other alternatives, as the collateral is significant. This combined with their long-term means that the monthly instalments will not be as burdensome as shorter-term more expensive alternatives. If you are considering this, do include an investment property mortgage broker, who will decrease your risks and maximise the rewards;

• A Construction Loan is great for major home renovators and maybe first home buyers. These are used when substantial construction, reconstruction and repurposing of the property will be underway. Suited to these needs, construction loans are also disbursed according to a pre-determined schedule. 

This is back-to-back with payments rolling out for the home reconstruction. Another feature of these types of loans is that you only pay interest on the utilised amount and you may even land on a product that provides an “interest-payment-only-period” at the beginning of the loan while the construction is ongoing. The collateral for these loans will be the property constructed or re-constructed;

• Unsecured loans are such, which do not use anything for collateral. This being an upside to these types of loans, the downside is that they will usually cost more than the above alternatives. The unsecured loans are typical with a tenor of 5 to 7 years, which is reasonable for repayment of a reconstruction loan;

• Credit card loans are probably the most used reconstruction loans for relatively small refurbishing bills. As easy as these loans are, you should take extra care not to overspend as the interest rates here will top our list. 

Hence, the first thing to do when considering taking up a renovation loan is what type will be most suitable for you. This could be determined by you personally or you may seek out some home loan brokers or mortgage brokers professional advice.