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Whether your idea for a home extension is big or small, you need the necessary funds to see your project through to the end.
There are many ways you can do this. And the approach you take will come down to a few factors: the type of extension project (i.e. bedroom, kitchen), and how much you can afford in loan repayments.
To help you make this crucial decision, here are some of the many financing options available to you, including their pros and cons.
Use the Equity on Your Home:
This is the most popular way for people to fund their home extension. Why? For starters, you don’t have to take out an entirely new loan, which means less paperwork and hassle for you. Plus, the interest rates are typically lower than other loan options on the market.
How much can you expect to get in equity? That depends on the banks’ evaluation of your house and how much you owe on your current mortgage. In most cases, you won’t be able to borrow the full value of your home, but you may be able to borrow up to 80 percent of your home’s value.
And the downsides? If your extension ends up being more expensive than what you can borrow against the equity of your home, you may have to look elsewhere for fund.
Get a Construction Loan:
If you’re planning a major home extension project, then a flexible construction loan could be for you.
This type of loan lets you access portions of your loan in instalments at each stage of your project. At the start, you agree on a fixed ‘pre-agreed’ loan amount and then gradually draw from your loan in bite-sized chunks, as opposed to receiving it all in one lump sum.
The main advantage to this is you only pay interest on the money you use. This means, if the scope of your project changes at any time, you can either borrow more or less than you originally intended with minimal risk. And, you can do so at any time – be it during preparation, getting council approval, or the building process itself.
Once the building is complete, you can then begin to pay the principal and interest payments. So you can maintain a steady cash flow throughout construction and not have to worry.
Refinance Your Home Loan:
At some point of paying off your mortgage, you may have the desire to refinance your home loan.
What does that mean? In essence, it is when you change your existing home loan for a new one, and in some cases with a new bank as well. You may wish to do this if another lender is offering a better deal, or you wish to increase the size of your loan to get more equity on your home.
Regardless, taking this approach is a great way to finance your home extension, and – if you find a better deal than your current one – possibly even reduce your home loan repayments… especially with the recent drop in interest rates.
Be careful though. If you refinance on a shorter term, even if your interest rates are lower, your payments could be higher overall. Another factor to consider is the associated cost of closing your current home loan, which could be in the thousands – depending on what your lender charges.
Borrow a Line of Credit:
If you have a reasonable amount of equity on your home, you could use a line of credit to fund your home extension.
A line of credit is an ongoing agreement between you and your lender. The lender gives you access to a pre-determined amount of funds, which you can access at any time in instalments or a lump sum. In a sense, it works very similar to a credit card.
On the plus side, you only pay interest on the amount you owe to the lender, not the full amount of the loan. And you are not limited to a fixed loan repayment schedule, thus you have more flexibility. Better still, since you have already proven to the bank you can make good on loan repayments, you are considered low-risk – so the interest is generally lower.
However, if your circumstances change, and you end up falling behind on your loan repayments, you could lose the equity on your home. If things get really bad, you could even lose the house. Fortunately, your lender will help you decide whether a line of credit is appropriate for you, and they can offer advice on risk management to make the decision easier too.