How to get the most from your home loan

17:00, Jun 23 2014
home renovation
SMART BORROWING: It makes the most financial sense to use your existing home loan to access the money you need for things such as renovations or a new car, as unsecured personal loans can have much higher interest rates.

Home renovations can be a daunting proposition, but accessing money for improvements around your property is usually a far less stressful task.

Vince Clark, head of home lending and deposits at ASB, says there are a variety of different ways homeowners can obtain funds for their renovation plans, with personal loans and home loan top­-ups just some of the options available.

Because higher interest rates usually apply to unsecured forms of borrowing such as personal loans, Clark says it makes the most financial sense to use your existing home loan to access the money you need.

"A home loan is likely to be the most affordable borrowing a customer will ever have. With home loans, interest rates currently range from around 6% p.a. to 7.5% p.a, whilst unsecured lending can start from 17.95% p.a. or more. That's a huge difference."

Clark advises would-­be renovators to do their homework by adopting a "common sense approach" to getting the renovation they want at the cost they expect, so there are no last-minute surprises.

Getting a variety of quotes and using reputable tradespeople is the first step to avoid a renovation nightmare. This will also provide an accurate gauge to determine how much money you will need to borrow, which is an important part of your conversation with the bank.

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If your renovation is a significant one, ask your builder for a fixed price contract to reduce the risk of a cost blow out. If that's not available, consider factoring in a contingency to allow for budget overruns. A 10-­15% additional contingency is usually enough.

"Once you've got an idea of your costs, have a chat to your bank so they can put together an arrangement that suits you. Options include a home loan top-­up or a re-­draw on a revolving home loan if you have one," Clark says.

"Expect your lender to discuss with you any documentation they might need to see depending on the extent of your renovations. This might include building plans, contracts or council consents. In some cases a new valuation may be required."

Although they are not required in every case, these documentation requirements protect the customer and the lender from any risk of over capitalisation. That's when the property's value is less than the cost of the property plus the cost of the improvements. Or in other words, when you spend more on the property than what it is worth in the end.

Sometimes it's well worth getting a valuer involved in your building project to provide peace of mind that what you spend on the improvements will increase the value of the property to the same extent.

Obtaining finance for your renovations should be the easy part, Clark says. Look for a lender that makes this process as painless as possible. Ensuring you get the renovation you want with no surprises from builders and other tradespeople should be the main focus.

And home loan top­-ups aren't just for renovations, but can also be used to buy large ticket items such as a new car or a holiday.

"Avoid the temptation, for example, of buying a new car with finance provided by a car yard without first talking to your bank as to whether there are better and cheaper options for you," Clark says.

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Click here to find out more about getting a home loan with ASB.