Renovations: adding value without overcapitalising

With the average cost of moving home estimated at around $40,000*, it’s no wonder many Australians are opting to extend or renovate instead. Having been through renovation work myself, I can vouch for both the good and bad things that come with it; hello living in dust! 

Renovating your home is a big decision that shouldn’t be taken lightly, so it’s important to consider both the pros and cons of renovation. 

Reasons to renovate or extend your home include:
  • adding value before selling
  • renewing the look of your home
  • expanding family that needs more space
  • improved quality of living
  • save time and money by renovating rather than relocating
  • adding features such as extra bedrooms, bathrooms, a deck or second living space

For all the benefits a renovation can bring, there are some cons; there is the possibility of overspending if unforseen costs arise, or even overcapitalising. Overcapitalising is when you improve a property beyond its real estate value, meaning you spend more on it than you would be able to recoup if you sold it. 

This is something to be taken seriously, as many Australians land themselves in trouble by not considering what overcapitalising is. You may be putting yourself at risk of overcapitalising by either underestimating the costs involved with renovating or not setting a budget, opting to DIY a renovation, or spending money on the wrong things.

Other disadvantages of renovating include having to move out while work is underway, or living amongst the construction for a few months. 

Financing your renovation
With the average renovation in Australia costing an estimated $20,000, most of us will need to borrow some extra cash to be able to afford a renovation. 

The main costs of your renovation are design, labour, materials, plus insurance, fees, permits and levies. You may also need to consider include alternative accommodation and/or storage space for your furniture if you opt for an extensive renovation. 

To fund all this, there are several options available:
  • Extending your current mortgage - This can help you avoid the costs of creating a new loan, but be aware that there may still be costs and time involved. You’ll need to have equity in your current home to do this.
  • Refinancing your mortgage - You may take the opportunity to review your mortgage at the same time, and refinance to a new one that enables you to borrow more. You may even find you are able to obtain a lower rate.
  • Construction loan - Some home loans are available for renovating or construction purposes. The loan amount may be based on the estimated completed value, and valuations take place throughout the process. This is often adopted by those without equity in their current property.
  • Short term credit - Suitable for small renovations, a low interest credit card can be a useful source of the funds you need.  

If financing your loan through a home loan lender, you may have the option to choose a line of credit rather than a term loan. This enables you to draw down the payments as you need them.

As with any loan, ensure you know exactly what you are getting yourself into. If you would like to discuss options, please don’t hesitate to contact iMortgage.