Can I fund renovations required to a property when we get a loan?

I got this question from a client tonight and it’s one I get asked often!

“Just wondering if there is room to get some money to renovate? For example, XXX Street has just come up but it desperately needs attention. It’s only $XXX,000 but could we borrow more to do that work to make it livable?” 

Here was my response:

Good question guys and the simple answer is – it’s not easy. 

Here are your options:

1. You use less of your savings for the deposit and keep those extra funds for the renovation – however this can mean paying more lender’s mortgage insurance if you are borrowing more than 80% of the value of the property (https://uploans.com.au/blog/2017/08/20/what-is-lenders-mortgage-insurance/)

2. You get a full quotation done for the renovation works.  A valuer then goes through and values the improvements for typically 1/2 to 2/3 of what they’ll cost you (i.e.: a new $10k kitchen might only “add” $5k worth of value) and then you do your loan application as a construction of sorts loan. 

Issues:  

 – it’s complex and slows your finance approval time frame significantly as you need all the reno quotes and any plans etc up front

 – a valuer typically isn’t going to add on as much value as it’s going to cost you – so you could be paying more lender’s mortgage insurance again

 – please bear in mind a bank might get gun shy if the property is in disrepair on lending in the first place

 – banks are less likely to want to fund renovations in lender’s mortgage insurance territory (i.e. borrowing over 80%) 

3. You can buy the property and then apply to do a top up once you have all your quotes – same issues as above but it doesn’t slow down your approval process as much. 

or

 

4. You can buy the property with as much deposit as you can swing together and self-fund the renovations over time. 

 

Hope that helps!! – Kirsty