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Financing Home Renovations

This post is brought to you by Newcastle Permanent

Renovating your home can be a fabulous way to add serious value to your home and improve your prospects at resale.  Interest rates are low and property prices are high, so renovating does appear to be an attractive investment option.  So the big question is, once you have picked out your new bathroom or kitchen, how are you going to finance it?

Here are some of the more common financing options when you don’t have the cash to pay for the renovations up front.

(1)    Take out a home equity loan or line of credit.

A line of credit or home equity loan is a loan against the value of your house but unlike a mortgage which must be used to purchase your home, a line of credit can be spent on anything, including renovations.  A line of credit can be spent in one hit or a little bit at a time, for example paying builders as you go.  Interest is calculated on the outstanding balance and you only have to pay the interest every month, that is it is an interest only loan.  Interest rates on a home equity loan or line of credit are generally slightly higher than mortgage rates.  Click here to find out more about home equity loans or lines of credit.

(2)    Redrawing from your current mortgage.

If you are ahead in your repayments and have a redraw facility associated with your home loan, you might be able to redraw from your current home loan to finance your renovations.  This can work quite well for small renovations.  You will need to check with your current lender to see if this is a suitable option for you and check if any fees are applicable.

(3)    Refinancing your mortgage.

If you have an existing mortgage, it can be advantageous to refinance it.  Especially if you are planning a major renovation, as this option will allow you to spread the cost over a long period and will allow you to take advantage of cheap mortgage rates.

(4)    Personal loan.

This can be a good option for financing smaller renovations.  They are short term loans which generally run from 3-5 years.  However, the downside is that interest rates on personal loans are generally higher than mortgages.

(5)    Tap into the bank of Mum and Dad.

This is great if you have parents or relatives who are willing to help you out.  However, mixing money and family can put a strain on relationships.  Make sure you have upfront, clear discussions from the outset on the rules and expectations around the money being lent, how it will be spent and when it will be repaid.

(6)    Use your credit card.

This is a convenient option if you already have a card with a high enough limit as you do not have to wait for a loan approval.  However, using your card can be costly, with interest rates of close to 20% being charged if you do not pay the balance off in full by the end of the interest free period.

There are a lot of options to choose from when deciding how to fund your renovation dream.  Which option is right for you depends on your individual circumstances.  However, once you have figured it out you are one step closer to calling in the builders and making that your renovation dream a reality.  Good luck!

This sponsored post is brought to you by Newcastle Permanent.

Newcastle Permanent:  have a range of options to help you finance the renovation of your home.  Check out their website here if you would like to find out more.

To find out The Best Thing You Can Do Before Designing A House Renovation” click here to visit my friend Bec who is also know as the Plumbette for some must read advice!

If you liked this post you might also like:

How To Pay Off Your Mortgage Faster

What Is A Line Of Credit And How Should You Use It?

How To Use An Offset Account To Pay Off Your Mortgage Faster

How I Saved Big On My Electricity Bill

Disclaimer:

The information contained in this post is general in nature and does not constitute financial advice.  Please see your financial advisor for advice specific to your individual circumstances.

05/12/2013 10 comments
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Property Investment

The Money Mummy Guide to Investing is back and this week we are going to look at the risk and return characteristics of property investments and how these could fit into your overall investment strategy.

Now as Australian’s we are renown for being in love with property.  It is easy to see why, residential property has been an amazing performer, such that we now have some of the most expensive residential property in the world.  I will have to admit, I have a bias against Australian residential property as an investment, right now.  Simply because on most measures it is simply unaffordable.  How many people do you know who are struggling to buy a property?  So despite low interest rates, in my view there is little room for property prices to keep on climbing.   (I will also admit that I said this five years ago when we brought our family home, at the height of the global financial crisis (GFC) and was proven completely wrong as property prices continued to climb!)

Now I am no expert in property investment (given my bias I have never brought an investment property) but here are some of the main advantages of investing in property:

  1. It is an investment that you can see and touch, so in that sense it is easier to understand than say an investment in shares
  2. Property returns, over time are seen as less volatile than shares
  3. You can earn rental income as well as benefit from capital growth, if the price of your property increases over time
  4. In Australia there can be tax benefits in purchasing an investment property, if the property is negatively geared (ie. the cost of the interest on the loan is larger than the rental income received)

The main negatives of investing in property include:

  1. The rental income, particularly nowadays, quite often does not cover your mortgage repayments or other expenses so you might have to use other income to cover these costs.
  2. Your returns from your property investment may be vulnerable to changes in interest rates, depending on the structure of your loan.
  3. If you urgently need to raise cash, selling the property might take a long period of time.
  4. You will have to cover all the costs if the property is left untenanted for a long period of time or if the tenants do not pay the rent.  You are also at risk that the tenants may not look after the property as you expect.
  5. Entry and exit costs are high, for example stamp duty and real estate agents costs.
  6. Residential property is a chunky investment.  If this is your main investment plus your family home you might lack diversification in your investment portfolio.  This means you are very exposed to any decline in residential property prices.  This was a hard lesson learnt by many American’s during the GFC (Global Financial Crisis).

It is often forgotten that property investment does not just have to be about buying a house or a flat.  There are many different types property investment that can be accessed through a managed fund or investment on the stock market (I will talk about these two forms of investment in a later post).  For example, within the property segment you can invest in retail property (ie. shopping centres), office buildings or industrial buildings.  Some investments offer you pure exposure to these segments or a mix of the three.  Each segment is driven by the same overall characteristics as residential property, it is all about collecting rent and capital gain in the overall price of the property.  However, each segment has slightly different drivers, for example shopping centres (retail) is more related to how much consumers are shopping, where as office buildings are more related to the growth in business spending.

If you are considering an investment in property right now, make sure you get some good advice.  Beware, there are many property spruikers out there who encourage you to borrow heavily and build large property portfolios quickly, this will leave you dangerously exposed to any fall in property prices.  Prices are high, so be careful and think hard before you commit my fellow investors!

If you liked this post check out the rest of the series by clicking on the links below:

Investing: How Do I Get Started?

What Is My Risk Tolerance?

Risk and Return

What Are My Investment Choices?

Fixed Interest Investments

 

Happy Investing!

 

Money Mummy

 

* Please note this post is for your general information only and does not constitute financial advice

04/07/2013 0 comment
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