Financing Renovations on your Properties:
Financing renovations by topping up on your home loan can be the easiest and cheapest way to get the job done if you don’t have access to the cash. ‘Topping up’ means increasing your existing lending with your existing bank. In some cases, if it makes more sense economically speaking, it could even be worthwhile refinancing (moving to another bank) for a better deal on your existing mortgage AND the new funds being requested.
When looking at things from an investment perspective, noting several changes occurring in the marketplace around investment properties, it always pays to view things as a business decision by weighing up the costs and benefits.
What you pay in dollars for the renovation work you’re looking at can warrant two major benefits that investors should be looking at:
· Increasing the Value of your rental property.
o Properties are one of the few assets that you can determine (to some extent) the value of your investment property by renovating and adding value. Renovations can come in two forms – cosmetic; new paint, carpets, landscaping, heat pumps, etc. and structural; adding a pool, adding a level, etc.
· Increasing the Rental Income of your investment.
o It would pay to discuss what renovations would actually get you a higher rental income with your Property Manager. Tenants may view things quite differently to you as a landlord, and in addition different locations/demographics would pay for different additions, so it is worthwhile getting insight before you spend money which wouldn’t warrant a return.
When looking to top up on your mortgage to fund renovations, you can work off either 80% on your owner occupied property, or 70% on a rental property, as the maximum Loan-to-Value ratio. If your lending is below this ratio, you then have ‘useable equity’ available. An example of this would be:
o Your home or rental is worth $1,000,000
o You have existing debt of $500,000
o Your ‘useable equity’ in this scenario would be $200,000 to $300,000 depending on whether it was an owner occupied property or investment.
In some cases, some of these costs and this debt may be tax deductible, and a good accountant can provide insight here.
Equity isn’t the only component to understand, and proving serviceability will be equally important. Feel free to discuss your options with us here.