Have you ever considered giving your home a facelift? If you're like many homeowners in Australia, you've probably toyed with the idea of renovating. But here's the million-dollar question: Which renovations truly pay off?

In this blog we explore the world of home improvements and the returns they offer.

Defining Return on Investment

When you hear the term "ROI," or Return on Investment, what comes to mind? In the realm of home renovations, ROI isn't just a fancy acronym. It's the backbone of every smart renovation decision you'll make. Essentially, ROI tells you how much profit you can expect to make from a particular renovation when you decide to sell your home. Think of it as a compass guiding you towards the most financially rewarding improvements.

For example, if you were to spend $60,000 on home renovations, which allowed you to sell the property for an additional $80,000, then your return on investment would be 33.33%, representing the additional $20,000 you made with the sale price.

Top Renovations with the Highest ROI

Kitchen Remodels

The kitchen, often dubbed the heart of the home, plays a pivotal role in your home's overall valuation. A minor kitchen remodel, which might include updating countertops to quartz or granite, installing a new backsplash, or upgrading to energy-efficient appliances, can recoup about 80% of its cost. If you venture into more extensive renovations like changing the layout or adding an island, the costs might be higher, but the appeal to potential buyers can significantly increase.

Bathroom Upgrades

A bathroom is more than just a functional space; it's a retreat. Modernising an outdated bathroom with new tiles, fixtures, or adding features like a walk-in shower or a double vanity can elevate its appeal. If space allows, consider adding a freestanding bathtub. These upgrades can lead to returns of up to 70% on your investment.

Adding Living Spaces

Expanding your living space, be it through a deck, a patio, or an indoor extension, adds tangible value. For instance, a deck with built-in seating and a fire pit can become a selling point. Indoor extensions, like adding a sunroom or converting a basement into a functional living space, can offer returns between 60% to 80%, depending on the quality and utility.

Energy-Efficient Upgrades

With the global shift towards sustainability, energy-efficient homes are becoming the norm. Installing solar panels, upgrading to double-glazed windows, or insulating walls can drastically reduce energy bills. These upgrades, while offering long-term savings, can also boost your home's value by up to 90% of the installation cost.

Landscaping and Curb Appeal Enhancements

Never underestimate the power of a well-manicured lawn or a freshly painted front door. Investing in professional landscaping, adding a garden path, planting mature trees, or even installing outdoor lighting can transform your home's exterior. Some homeowners have seen an impressive 100% ROI from strategic landscaping projects.

You're not alone in your renovation aspirations. Australia is witnessing a renovation renaissance. With property prices soaring, many homeowners are choosing to upgrade rather than relocate. Factors like the desire for modern amenities, the need for more space, and the appeal of increasing property value are driving this trend. And with success stories of homeowners reaping significant returns on their renovations, it's no wonder the trend is catching on.

Financing Your Renovation: How Much Can You Borrow?

Now, let's talk money. How much can you realistically borrow for your dream renovation? Several factors come into play:

Your Home's Current Value

Lenders will assess your property's worth to determine how much they're willing to lend. Many lenders may allow you to borrow up to 80% of the value of your property to fund renovations, particularly if they’re carried out by a licensed builder. The 80% can also be based on the completed value of the property once the renovations are complete.

Let’s say for example that you have an $800,000 property, but when your renovations are complete, which will cost you $150,000, the builder has suggested that the property would then be worth $1,000,000. In this case, the bank would confirm their assessment and if they agree with the completed value, in many circumstances they would allow you to borrow up to 80% of the finished value, or a total loan amount of $800,000 including any existing mortgage you may have in place.

Your Income and Expenses

Your ability to repay the loan is crucial. Lenders will scrutinise your financial health, so ensure your finances are in order. This is important for any loan, but in this case if they’re releasing additional funds for you to cover the costs of renovations, they will want to be sure that you can afford it.

Type of Renovation

Structural changes might warrant a larger loan compared to cosmetic upgrades. Whether the renovations are going to be completed by yourself or a licensed builder will also likely impact the lender’s appetite for releasing the additional funds to you.

On average, Australians borrow anywhere from $20,000 to $200,000 for home renovations. But remember, always borrow within your means and have a clear budget in place.

Exploring Financing Options for Home Renovations

So, how can you fund these renovations?

Home Equity Loans

Your home isn't just a living space; it's an asset. A home equity loan allows you to borrow against your home's value. It's a popular choice due to its lower interest rates compared to other loans. This refers to the 80% loan to value ratio that I mentioned above, and can in many circumstances be based on the completed value of the property.

Personal Loans

If you're looking at smaller renovations, a personal loan might be your best bet. They're quicker to secure but come with higher interest rates. It’s important to ensure you have a strategy in place to pay this down quickly given the higher interest rate.

Refinancing Your Mortgage

Consider this option if you're looking for a larger sum. Refinancing can allow you to tap into your home's increased value since its purchase. This could mean that you increase your loan balance to 80% of the new property value allowing you to release additional funds.

Government Grants and Incentives

Keep an eye out for government programs that incentivise certain renovations, especially those focused on energy efficiency. These can significantly reduce your out-of-pocket expenses.

Conclusion

Renovating your home is more than just aesthetics; it's a strategic move that can yield significant financial benefits. By understanding the ROI of different improvements and making informed decisions, you can enhance your living space and boost your property's value. So, as you dream about that chef-inspired kitchen or spa-like bathroom, remember that with the right choices, you're not just spending; you're investing.

If you’d like to explore your options to renovate, and how much you could potentially borrow, reach out to our team at Ally Home Loans for a complimentary review.

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.