What to consider when planning a home renovation

Plans

Home renovations are definitely not something to rush in to. Take your time, do your research, and you’ll end up with the right outcome.


Increasingly, Australians are deciding that staying put and renovating is a preferable option to upping sticks and moving.

And understandably so – the costs involved in moving can make the cost of renovating significantly more appealing, and a smarter – if potentially more time consuming – approach to take.


Reasons why people renovate rather than move

In 2018, the renovation market in Australia was worth around $9.9bn, and Pratham Karkal, Head of Personal Banking Direct at Macquarie’s Banking and Financial Services Group, says there are three key factors that can explain this.

“The costs of moving are significant – they can add up to $100,000 or $200,000,” he says. “When you consider that, compared to the cost of renovating your home to be what you need it to be, it can be more cost effective to add an extra bedroom onto your existing property, than move to a new place.”

In addition to cost, there’s a TV-generated desire for home improvement. Reno’s are ‘in’. “There are so many TV shows tempting people to renovate, pointing out what’s wrong with your house, it makes people look at their property critically. They think, ‘I want a piece of that too’.”

Thirdly, and especially important in the market over recent years, has been the simple desire to get into the property market.

“People are buying the worst house on the best street and then renovating it,” Karkal observes. “Buying a house they're not that comfortable to live in, but think ‘We'll knock this wall down, redo the bathroom and kitchen, and it’ll be much better’.”


Home improvements to sell

If you're hoping to add value to your property through renovation, you should be strategic about what you prioritise.

Before you get started, research what buyers are looking for – talk to real estate agents and view other local properties that are on the market for insights. Then, use your budget to target those areas of the property that will achieve the biggest bang for your buck.

Don't worry – your property needn't be covered in gold – it just needs to be presented as better value for money than comparable properties.

Common ways to maximise the value of your property include:

  • adding a room or creating space by removing walls
  • updating the kitchen and/or bathroom
  • adding a second toilet or bathroom
  • improving lighting and ventilation
  • adding storage areas, such as wardrobes
  • adding secure car parking
  • introducing an alfresco entertaining or dining area
  • putting in ducted air-conditioning

“When renovating, you have to prioritise quality,” says Karkal. “Spend money on the areas you see every day, like kitchen cabinets, the front door, bathroom fixtures and fittings, that's where you're going to see value or demonstrate value. If you skimp on that, people are going to be turned off. Focus on the areas that you're constantly seeing. Potential buyers will go, ‘Wow. I love those windows’.”

Bear in mind, however, that not everything you spend will be added to the value of the home.

“Usually 80% of what you spend will be added to the property value if you do it well,” says Karkal.


Things to consider when renovating to stay

Of course, you may not be renovating with the intention of selling - you may be making the property more suitable to your current needs, or you may have bought a home that needs work.

The key thing to remember when doing this is that the value of aesthetic and structural changes are subject to individual taste. Be wary of doing anything that may detract from the appeal of the house down the track.

“I’ve seen people who have a quirky personality paint the house a bright Tuscan orange,” says Karkal. “Straight away they drastically reduce the pool of people who might want to buy their house in the future.”

When undertaking any renovation, it’s essential to have a ‘grand plan’.

“A common mistake people make is they renovate too early without a master plan. They knock a wall out and do it piecemeal, one room at a time, and you end up with a home that doesn't flow.

“Another big one is people who think they're their own architects. If you’re not an architect, don’t do it. Don’t skimp on the design.”


Financing your renovation project

Of course, having the plan (drawn by an architect) is one thing – getting the finance together is another.

It’s wise to have a realistic idea of how much you want to spend to start with and, a rule of thumb, says Karkal, is to spend around 2% of the property value on any one room. “If you've got a million dollar house and you want to do your kitchen, look at spending $20,000. If it's a $2m house, use $40,000 as your guide.”

When assessing how much you will need to finance your renovation, it’s important to err on the side of caution.

“Things will always pop up when you’re renovating, so you need to have a 20% buffer. In older houses, some wiring might need replacing; you might find asbestos in the roof or behind the wall, there might be an unstable brick wall, which you thought was fine.”

There are a number of finance options available for renovators, depending on the size and scope of your renovation.

If you already have a home loan with an offset or redraw facility with funds available, consider using that to fund the cost of your renovation. Your home loan interest rate should be much lower than obtaining finance through a credit card or personal loan.

Depending on whether you're making structural or cosmetic changes to your home, you might like to consider:

  • a home equity loan
  • a construction loan
  • an offset account
  • a mortgage redraw facility


Construction loan

A construction loan works by allowing you to borrow against the value of the property. In this case, the lender will take into account the estimated value of the property after renovation. A renovation only qualifies for a construction loan where there are structural changes made.

If a valuer determines that your renovations will add $100,000 in value to your $800,000 home, the lender calculates your equity at $900,000 minus your current mortgage. The loan amount is generally released as renovations progress to ensure the funds aren't used for other reasons.


Offset account

An offset account is an account that operates in conjunction with your home loan. The balance of funds in your offset account is deducted from your outstanding home loan balance, reducing the interest you pay on your loan.

For example, if you have $50,000 in your offset account and a $500,000 mortgage, interest is only charged on $450,000. If you then withdraw $10,000 to fund your home renovations, you'll be charged interest on $460,000.

Home owners may want to use an offset account to save for the renovation. That way, in the process of saving, you’re lowering the interest you have to pay on your mortgage.

With a Macquarie offset home loan package you can access the funds in your offset account at any time through ATMs, your debit card, online or phone banking. So when you have enough saved to start renovating, you can pay for the project straight out of your offset, without the hassle of having to apply for finance.

Using an offset account as part of a holistic financial management program can have many benefits. Explore how you can manage your money with Macquarie’s smarter home loan.

Mortgage redraw facility

A mortgage redraw facility allows you to access any extra payments you've made over and above your minimum monthly repayments.

By redrawing money already paid into your home loan, you can finance your renovation on the same terms as your home loan.

Remember, if you are taking out a new loan or refinancing to unlock home equity to fund the renovation, you will have to go through an enhanced credit assessment.

Speak with your bank or mortgage broker and they will be able to guide you through the process, helping you turn your renovation dreams into reality.

Key takeaways

  • When considering whether to move or renovate, make sure you consider all of the costs of moving.
  • Be strategic about what you spend money on when renovating, not everything will translate into additional property value.
  • Have a master plan before you start - don’t do it piecemeal.
  • Consider the likely impact on resale value when it comes to renovation choices and colour schemes!
  • As a rule of thumb, spend around 2% of the overall property value on any one room.
  • Allow a 20% buffer in your budget for the unexpected.
  • Speak with your bank or mortgage broker for advice on the best way to finance your renovation.

Ready to renovate? Explore your options by speaking to one of our home loan specialists. Call 13 62 27.

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Unless stated otherwise, this information has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502 and does not take into account your objectives, financial situation or needs. You should consider whether it is appropriate for you. All applications are subject to Macquarie's standard credit approval criteria.