If you’re lucky enough to have owned your home for a few years, you’ll hopefully have plenty of juicy equity to borrow against to create your dream digs.
Most people will look at this refinancing option when it comes time to spend up large on a reno. That’s not to say the banks will automatically throw money at you.
Refinance your mortgage
If you’re looking at refinancing the mortgage, your bank will ask for a few things to cover its end:
Can you cover the increased costs? The usual shebang with lending is
having to show you can afford it. You’ll need a few months’ worth of
payslips, bank statements and credit card statements.
The bank will have the tools to get a value of your home now, but
might ask for a valuation of the finished, renovated property. You
might need to pay a registered valuer for this.
The bank might ask for a copy of the drawings from the architect.
A signed building contract to show it’s all ready to go
Your builder’s details. Your bank will want their Licensed Building
Practitioner number and insurer details.
Confirmation of resource or building consents (if you need them)
Proof of insurance. The bank will want to know that the property
they’re giving you money for is protected.
Shop around the different banks when looking to borrow for your reno. A competitor might gladly lend you the money – it could even be at a lower rate.
How to structure it
If the job is taking place over months and months, you can set up your loan as a separate offset facility. That way, you only pay interest on the amount you take out to pay for things as they progress, not the total amount of the loan.
The interest rate that’s charged is usually the bank’s floating rate. It’s always higher than their fixed rate, so go in knowing you’ll pay more.
That said, when the job’s done, you should be able to fix at a lower rate.
If you don’t have a lot of equity in your home, another option is a construction loan. Borrowing for these loans is based off the future value of your place once the work is completed.
Rather than getting a lump sum, your bank may exert more control over proceedings. So as invoices come through, the specific amount gets paid directly to the contractor.
While the job is under way you usually only need to cover the interest repayments for a period. You’ll then revert to the usual loan repayments that tackle both interest and the principle when the job is done.
If it’s a smaller, quick job – you could opt for a fixed, lump sum payout. You’ll still have to jump through the same hoops with the bank, but there’s less management from your end. The money comes through, it’s yours to disburse as you wish, and you start paying it off immediately.
Banks and finance companies also offer personal loans for remodelling, both secured and unsecured. However, interest rates are much higher than those offered for home loans.
If you dip into your savings, just be sure to leave enough to cover the inevitable, unforeseen costs that’ll pop up.
Consider gunning for Homestar certification when looking at re-doing your place. Homestar is a housing rating tool that awards scores in health, sustainability and efficiency, and is administered by the non-profit New Zealand Green Building Council. Even the lowest Homestar rating shows your home is warmer, healthier, and cheaper to run than your bog-standard place.
Homestar does add a premium on to your build – it’s a whole building certification. So, if you’re only aiming for a better kitchen or bathroom, pull the pin immediately. There are also some non-negotiable thresholds you need to meet that can be expensive installing into an older home, such as upgrading windows and having enough wall insulation.
While pricey, your place will be a much better place to live in afterwards and cheaper to run. Some banks are getting on-board. For example, ANZ offers a home loan package with a discount of 0.7 percent to anyone building or renovating to a Homestar standard.
That sort of discount is not something to be sneezed at. Run it by your designer and see if the odds land in your favour – while unlikely to save you money over and above a bare bones reno, you might be surprised at the small premium required for a much better home.
There’s an argument to be made that a certified home will also attract a premium sales price.
While interest rates are currently low, it’s still a better deal if you can reduce the number to zero. Westpac offer an interest-free “Warm Up” loan of up to $10,000 if you spend it on insulation, heat pumps, double glazing, a ventilation system, woodburners or solar power.
Unless your home is the size of a shoe, you’ll be lucky to deck your place out with double glazing for less than $10k. However, that money would go a long way towards a upgrading your insulation or adding a hefty heat pump. There is a catch, it’s interest-free for five years and everything needs to be installed by a pro – so no DIY insulation here.