I recently had a client who was pre-approved to purchase borrowing 80% of property’s price. She had around $100,000 saved up and wanted to know if she could borrow about another $40,000 more on top for renovations.
Now borrowing 80% is a really sweet spot when it comes to getting a loan because that’s where the bank charge you no lender’s mortgage insurance as they see the deal as overall less risky.
Here was my response to the client as far as options went:
Option 1 was to simply contribute the same 20% + costs to get us to 80% borrowings and then to use her savings for the renovations and save up for the rest. This left her around $5,000 short on the overall renovation budget.
Option 2 was to borrow slightly more than 80% leaving her $40,000 in savings. This option saw her borrowing less, but paying around $1500 in lender’s mortgage insurance for the privilege of doing so.
Option 3 was to have a builder give her a full fixed price quote, plans and inclusions for the renovation that is required and for a valuer to then inspect the property with that information and to asserting that the value of the property will be after the work is done. The valuer will then assign a value to the completed product (typically adding on around 1/2 to 2/3 of what you will be spending as a rule of thumb). She’d then borrow 80% of this figure and the works would need to be done by that licensed builder and the builder would be paid in instalments.
Potential downsides to this were:
– she’d have to have her fixed price building quote and information before the valuer will quote, and this can take time which means we’d likely need to get the deal approved at just a straight 80% lend and then amended once you have your quote.
– if she wanted to have multiple tradespeople do the work or do some yourself, this can cause issues with the lender allowing this.
– it’s more timely and arduous than option 1 which is very simplistic.
Ultimately this client chose option 1 and has just used her considerable savings capacity to save up the extra costs.
When you’re borrowing 80% of the purchase price- you have more options open to you. As that loan to value ratio gets higher, the harder it is to get funds approved for renovations (option 3) and the more likely 2 becomes for you – but bearing in mind that lender’s mortgage insurance can be expensive and the higher the percentage of the property you’re borrowing in – the higher the cost.
Feel free to chat to us to find out what your specific situation may allow. – Kirsty