Questions to ask yourself before diving into a renovation
For many Australians, the pandemic has increased our appetite for renovating. With more time spent at home, extra downtime and little opportunity to spend our dollars on an overseas holiday, we are looking to make our own space a little more liveable.
According to the Australian Bureau of Statistics, the value of residential alterations rose to a four-year high last year, with the Housing Industry Association predicting the total value of renovations to surge to $36 billion this year.
With more of us jumping on the home improvement bandwagon, it can be easy to get swept away by glamorous after shots on popular reno shows or a visit to your local kitchen showroom.
Before rolling up your sleeves and donning the toolbelt, here are some important questions to make sure your heart and head are home improvement aligned.
Why are you renovating?
Although it may seem a little obvious, it’s always a good idea to go into a renovation with a clear purpose. The reason for your reno will guide many future decisions (ie. choice of appliances or structural vs cosmetic work), so it’s important to be clear from the outset.
Are you looking to improve the value of your home because you intend to capitalise on the recent house price boom? Or is it to make improvements to suit your particular situation such as a growing family, a home office or an aesthetic change to modernise your home?
If it’s the former, make sure you speak to a knowledgeable real estate agent in your area to assess how much your planned renovations would add to the market value of your property. Even if you are renovating without the intention of selling, it’s always a good idea to keep in the back of your mind how your renovations will add to your future resale value to avoid overcapitalising on your investment.
To reduce the likelihood of costs blowing-out, before you start, create a budget outlining all materials and approximate costs for any trades people you’ll need to carry out the works. Working to a budget will keep your project on track while minimising over investing in your renovations.
What can you buy in the same area for what your property is worth plus renovation costs?
It’s important to do some general research on house prices before committing to a renovation spend. By having a realistic understanding of the market and the sold (rather than asking) prices of comparable listings in your area, you can be better informed about where to direct your renovation dollars.
A general rule of thumb is that for every $1 you invest into a renovation, you should get $2 back when it comes to sale time. In some cases, surveying the market can be a real eye-opener. This may be the point at which you decide to scale back planned work or realise it’s better value to buy another home than modify the one you’re in to meet your needs.
Which areas will you renovate?
Deciding where to allocate your spend is an important choice, as not all areas of the house will achieve the same return on investment or benefit to your household. Generally speaking, areas that will get you the biggest bang for your buck are outdoor spaces and projects that contribute to curb appeal.
As Australians, we are lucky to live in a climate that lends itself to outdoor living. A simple renovation such as adding a deck using low maintenance materials can extend your home’s liveability, adding extra living space at low cost.
Kitchens and bathrooms are often the first areas of the house to date and the most popular (and costly) areas to update. With careful consideration, there are many smart options to bring these expensive ‘wet’ areas into the 21st century without breaking the piggy bank.
Cosmetic, rather than structural changes are the key to transforming these spaces, but always consider getting a building report to identify any underlying structural issues before investing in cosmetic procedures. Also keep in mind that if you live in a lower socioeconomic area, you may not be rewarded for investing in top end appliances or finishes. It’s also important to check with your local Council whether any of your renovations or extensions require Development Approval.
Have you planned for non-monetary costs?
Have you factored in your time into your renovation costs? All too often the focus is on monetary investment, when the biggest costs of renovating might be personal. Will your household have to undergo a temporary lifestyle change or relocation? Have you been realistic in evaluating your lifestyle and your ability to project manage a renovation or complete certain work yourself? List as many renovation costs upfront as you can and evaluate what is within your scope of expertise and what is best to outsource to avoid becoming overwhelmed later on.
For many of us, now might be the best opportunity to get ahead on your reno, as you swap the time spent on your daily commute for tackling that paint job or grabbing supplies and a sausage from Bunnings.
What are your funding options?
It’s important to consider all options available for financing your renovation to find the solution which suits your situation best. One popular way to pay for home renos is to access the equity in your home loan to finance the upgrades. This may be possible if you’ve paid enough of your home loan off in advance and you can simply redraw the funds from your loan. This will increase the money you owe on your mortgage but can be a smart option to spend a penny to make a penny in the future. Even if you haven’t paid your loan down enough, if your home has increased in value, you may be able to apply for the refinance amount you need. In this situation, effectively your loan to value ratio has decreased, meaning you owe a smaller percentage of the total value of your property to the bank, allowing you to borrow more.
Keep in mind that you will need to check for any redraw fees and limits first. Also be careful when ‘shopping around’ for the best deal. Every loan application process requests a credit check and this may impact your credit history.
For larger renovations, and where there may not be enough equity in your current home loan, construction loans are another product available that may suit your needs. Construction loans can be a great option because unlike redrawing on your existing loan, they can take into account the value of the work once it’s completed. SCCU has a range of loans to suit your renovation needs, and personalised lenders to help you find the right match.
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Disclaimer: The ideas, discussions, options and details expressed in SCCU Blogs are for general informational purposes only and are not intended to provide specific personal advice or recommendations for any individual or on any specific security or investment product. We intended only to provide education about the financial and banking industry to make the complex simple, and help everyday customers realise their dreams.