Are you thinking about renovating your home or investment property?

Are you an Australian expat currently working abroad and starting to think about returning home, but before you do you want to renovate your existing property so that it’s ready for you to move in?

Unlocking the existing equity in your property could be a great way to do exactly this. This week we’re exploring how you can access the unlocked value in your own property to cover the costs of any improvements and/or construction. According to the Housing Industry Association (HIA), approximately $30 billion is spent on renovations each year, and in many cases, this is fund by unlocking the equity in your home.

The first step is to calculate the equity that you have available in your property. In simple terms, the equity in your home is the difference between its value and how much you have left to repay on the mortgage. Therefore, this will be equal to any change in the value of the property since you’ve owned it and any amount of your mortgage that you’ve already paid off.

For example, consider the following: Jim owns a property worth $1.2M, and he currently has $450,000 less on his mortgage. Jim’s equity will be calculated as follows:

• Value of property – Mortgage = Equity
• $1,200,000 - $450,000 = $750,000

What can I use the unlocked equity for?

Now we know how much equity Jim has available, and it’s important to recognise that this equity can be used for a range of items, which we’ve outlined below:

• Renovating your home or investment property
• Covering the deposit and/or purchase costs of another property
• Investing in a business, shares, or otherwise
• Consolidating your existing debts
• Buying other items
• Repaying other loans

Today we will simply focus on the renovations option.

How much of the equity can I access?

Banks and lenders will still expect you to comply with the Loan to Value Ratio (LVR) rules, and most will cap this at 80%, which means that you can access up to 80% of the available equity in your property. If we revisit Jim’s example from earlier, the figures would be as follows:

• Property value = $1,200,000
• Maximum loan amount = 80% = $960,000
• Existing loan = $450,000
• Available additional loan = $510,000

This means that Jim could access a further $510,000 to cover renovations or other items that he wants to use this money for.

What if my renovations increase the value of the property?

If you’re planning significant renovations to your property such as replacing a bathroom or adding a bedroom, you may wish to obtain a construction loan, which would be steadily drawn down based on an agreed-upon schedule with the builder. This would require you to have a registered builder provide you with the plans as well as the payment schedule. The builder will provide you with an outline of what will be involved as well as the cost of the renovations.

Once you have this cost and a detailed outline of the proposed renovations, you can obtain a valuation via your mortgage broker based on the property once the renovations are complete. If the property is expected to increase in value as a result of the renovations, then you may be able to access further funds. For example, if we revisit Jim’s example, and assume that he’s completing renovations that will increase the value of the property to $1.6M, this may mean that his total loan could be up to $1.28M, allowing him to release an additional $830,000 in equity to cover the renovations and any other planned expenses.

When it comes to renovations and setting up construction loans, it’s important to seek professional advice from an investment-savvy mortgage broker, so that you can ensure that your loan is structured appropriately and that you’re not paying unnecessary interest or fees.

If you’d like to explore how much equity you could access in your own home, and what your lender options look like, feel free to reach out to our team at Ally Home Loans today and we’ll be happy to walk you through the options.

Ally Home Loans Pty Ltd is your ally in finance for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.

Book an obligation-free, complimentary consultation here today.

Ally Home Loans Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.