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Funding a Reno Without Equity?

Discussion in 'Property Finance' started by House, 19th Mar, 2016.

?

Best Choice to Borrow for a Reno?

  1. Construction Loan

  2. Overdraft

  3. Credit Card

  4. Personal Loan

  5. Borrow from Friends/Family

  6. Peer to Peer Lending

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  1. House

    House Well-Known Member Premium Member

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    Slowly getting the deposit together for the first IP so have started thinking about how to find the reno $'s instead of waiting another year to save it.

    Ideally will be looking to cosmetically reno and add a bedroom/bathroom internally but may have to add one externally. If that's the case, will need to come up with ~$40k.

    I've read that construction loans are available for around 5% and can be paid off over 30 years and have interest only periods. Would this be my best/most cost effective option?
    Is it possible to pay it off with the equity gain?

    Had a quick look at overdrafts, personal loans and credit cards it probably too costly or not possible for a fairly large sum.

    Has anyone else used a construction loan for smaller reno's?
     
  2. JacM

    JacM VIC Buyer's Agent Business Member

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    Hi @AlexH

    First check your loan agreement for the property .... it is possible you can't do an extension (alteration to the building) without permission of your lender.
     
    House likes this.
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    If an investment then you won't want to be paying the loan back, but have IO to divert funds to non deductible debt.

    Construction loans will need a contract with a registered builder.

    Family loans can be easiest, but there may be a change you cannot pay them back. If you borrowed from family you would want to increase the loan with the bank and refinance the family debt. But this may not be possible in the short term if lending criteria tightens up and/or your valuation doesn't come in.
     
    House likes this.
  4. Nemo30

    Nemo30 Well-Known Member

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    If you're planning on spending $40k - I'd also be looking at what an extra $40k buys you when looking for your ip. It might be a fully renovated place with an extra bedroom already.
     
    Loz and Corkey like this.
  5. House

    House Well-Known Member Premium Member

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    Thanks for the responses guys :) Didnt realize construction loans were available for smaller projects so very happy about that!

    Didn't know that could be a condition so thanks for pointing that out. Is it common and possible to ask to be removed if there?

    True but rather create the equity myself given the median difference for 3&4br where I'm looking is $100k+
     
  6. tobe

    tobe Well-Known Member

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    Construction loans are only available with a fixed price contract with a registered builder. And only then if the banks valuer agreed the Reno will add value to the property. Fixed price contracts are more expensive for most small builders so you might have trouble sourcing an affordable contract for smaller jobs.
     
    albanga likes this.
  7. Redom

    Redom Mortgage Broker Business Member

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    You can get a construction loan - but its quite a hassle (progress payments, registered builder, fixed price contract).

    It usually makes sense to use shorter term funding options, then revalue the place, withdraw equity via a normal equity release process, and then repay the shorter term funding options ASAP. Time is of the essence here, as the finance saving between the short term funding option and the home loan equity rate is usually quite high (e.g. CC at 20% vs Home loan at 4.5%).

    What you must do before this approach though is make sure you service and have a finance plan in place to get it done. IMO it usually makes sense to do this at an 80% LVR given the constraints on releasing equity above 80% with most lenders, but thats not always feasible when deposits are limited (usually are when this question is involved).
     
    House and Terry_w like this.
  8. dabbler

    dabbler Well-Known Member

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    I would not have thought small renos would be worth playing around with loans, hard enough when buying or building as it is.

    May be better to look for something that does not require much beside the labour and cheap stuff like some paint etc.

    Unless you have cash/equity somewhere, I would be looking for something not needing too much, you also lose income if reno times take too long, bad enough losing weeks when place is ready to occupy IMO, so a lot to think of (I also am mindful of injecting funds anywhere, it can be hard to get back if forced to sell & I think the way many did it in the past is too hard now unless you have plenty of borrowing capacity)
     
    House likes this.
  9. albanga

    albanga Well-Known Member

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    I don't think a construction loan is a good idea. The cost of the Reno is minimal and once you Add on the builders cost I would be concerned how much gained equity will simply be lost in builders margin.

    Hit up a family member or friend, create a win/win with a high interest return which is cheaper than what you would get from a credit card/personal loan versus what they would get in savings/offset. Even having it drawn up commercially I would imagine a healer option than the alternatives.
     
    House likes this.
  10. House

    House Well-Known Member Premium Member

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    So not as easy as I previously thought but at least it's an option. Thanks for all the information and advice, appreciate it :)