Can you borrow money to renovate?
The short answer – is yes. There are two key ways of borrowing for renovations (large, or small).
Firstly, through your bank this will involve having sufficient equity within your property to complete the required renovation.
If it is a minor renovation, you want to be below 80% LVR on your home, or below 65% LVR on your investment, and topping up to the respective limits (depending on property type) will be the amount you’re able to top-up by for minor reno’s. To calculate your topup amount the formula is below:
(Current House Value x LVR)- Current Debt Limits*
*Note that debt limits refers to not just the balance owing on your mortgage facilities, but rather the limit. In many cases clients don’t include their revolving credit facilities (undrawn) and therefore end up mis-calculating their top-up amount.
In a lot of cases there are also second mortgage options or non-bank options to assist you if you are above the required LVR thresholds. If this is the case, what you want to do is ensure that the end-value after the renovation allows you to refinance back to a bank when you’re done – for example:
Step 1: Your property is worth $800k, your debt is $640k (80% LVR) and you want to do a $200k renovation to the property. You don’t have any cash to put towards this deal.
Step 2: Your property will be worth $1.1m at completion, and your debt position will be $840k (76% LVR).
Step 3: Because you’re at 76% LVR, now that the renovation is complete (and you’ve got a valuation and if required, code of compliance) you meet the bank’s equity criteria to top-up and refinance out the second mortgage.
Just make sure that before you take a second-mortgage or non-bank option out in this scenario, that in fact you can meet bank servicing requirements when the renovation is done. You also want to be sure of your proposed estimated values at the end, and renovation costs.
Feel free to get in contact if you’d like assistance on this!
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