Securing a dream home is the aim for many Australians. While it takes a lot of research, once you've moved in, it's time to kick back and enjoy your new investment.
However, as time passes, it can become clear that what was a perfect home needs some improvement. This is likely to be the case if you're growing your family, and have added a couple of kids to the home since moving in.
Consequently, while relocating and finding somewhere new is an option, it can be much simpler to keep your dream home, but better it with renovations. So, how do you plan for this process from a financial perspective, and does it take additional funding on top of your home loan?
While extra capital is typically the answer, it's important to establish exactly what you want from any kind of renovation, before putting in the hard work and exploring how it'll be funded.
It's important to focus on improvements that will actually benefit you.
Laying the groundwork
Make a 'wish list' for your home renovation as a starting point. Split this into two columns: One for your wants and another for your needs. You'll need to be as practical as possible here.
A huge walk-in wardrobe or fully-stocked game room may sound like a good idea, but it's important to focus on improvements that will actually benefit you the most in the here and now, as well as potentially add value further down the line.
Once you've weighed up the options, you can work out the scale of the overarching renovation, and begin to build a picture of the financing that could be required.
Just like your home addition will need foundations, you need to build a stable base of financing before work commences.
Assessing the value
The next step in the process is to build an understanding of how much value you could potentially add to your home. As touched on, renovating for the sake of it is never a good idea, and you really need to double check that any improvements will offer a solid return in the long term.
Consequently, think of any work or home addition as you would other investments. If there's a solid chance that you'll make a profit, go ahead and start making more concrete plans. If your ideas are a little grandiose and may not prove to be valuable in the future, rethinking them from the ground up is a must.
Experts say, when home improvements are done well, you could essentially double your money on every dollar spent. This is notably the case when adding more space, such as an extra living area or another bedroom.
Moreover, the kitchen and bathrooms typically represent good value, too, with a return of around $1.50 on each dollar put towards the work. These figures aren't set in stone, however, and are dependent on the quality of the work.
Crunching the numbers is a key step in establishing whether you can afford a raft of home improvements.
Nailing down the budget
Once you have a broad idea of the type of work you want to carry out, getting a more defined estimate for a budget should be the next thing on your to-do list. Major remodelling in family rooms, kitchen and bathrooms tends to cost around $100-200 per square foot.
While that includes the space itself, you need to ensure that you have an appropriate amount of funds to cover the fixtures and fittings when the shell of the upgrade is complete. Once you've run through the numbers and come up with a finalised figure, you'll typically have three options for financing the project:
- Cash-out refinance
- Home equity line of credit
- Home equity loan
For many homeowners, a line of credit can prove to be the most valuable option as it uses your home equity to offset the new finances, which ultimately means that you can secure a lower rate of interest from lenders. Again, just like the process of taking out your home loan initially, you need to work out your repayment schedule to see exactly how you'll need to budget month-to-month.