This article will explain why sometimes it doesn’t pay you to wait to apply for a Renovation Loan.
Please read on to discover why a lot of Australians are getting on with the job of renovating their home sooner, rather than later.
What is a renovation loan?
The purpose of a renovation loan is when a bank agrees to fund alterations and improvements to a home. Also known as remodelling, home improvement, home renovation and refurbishment loans, these loans are designed to assist you in completing the project, in order for you to enjoy the benefits whilst you are paying off the loan.
Depending on the size of the renovation, and the lender that we approach for finance, the lender may choose to call this a construction loan. It is called a construction loan simply because the lender will want to be in charge of the funding, as it is needed. Please see our Info page, Construction Loan for much more detailed information in relation to this type of loan. Please feel free to call a mortgage broker at Illawarra Mortgage Brokers to discuss your options in detail.
Why wait to renovate?
We have met many clients over the past 16 years, who have applied to refinance their homes to a more competitive lender, in order to save money. We have found that these same clients had a desire to pay a little bit off the home loan, with the purpose of redrawing to complete some remodelling or renovation work on the home. They had decided it would be better to wait, save some money, and then redraw the money to pay for these home improvements. Maybe it would be better not to wait.
Due to the huge amount of negative misinformation regarding guarantor home loans, I felt compelled to write this little article. You can find a long winded version here.
These types of loans may not be as risky as you think – and the child might move out of your home sooner
As a mortgage broker, we see all benefits and only one risk – the risk is that the child might stay at home…
Jokes aside, we would like to walk you through the pros and con (yes one), of a guarantor home loan. The guarantor home loan would be one of the most misunderstood facilities in lending.
We understand that it is a serious decision to put your home on the line with blind faith that the child (the applicant) will “do the right thing”.
Let’s look at the whole picture. Your child and his partner, now known as “The Applicant” has asked you to help them buy a property. To help them, they have asked you “the guarantor” to use your home a security. Basing this article on the assumption that the applicant had their house for two years and got divorced and now one wage will not cover the repayments. (We used a two-year assumption simply because the applicant’s ability to service the loan at the time of the purchase would have been assessed by the lender and approved. It is any future issues that are of real concern.)
What will happen now?
- In every Guarantor Home Loan, there will be two properties at least, being used for security.
- In the event that the applicant does not pay for whatever reason and the lender wants to take action to recover the debt, the applicant’s house is sold first.
- It should be safe to assume that the house would realise a sale price, similar to the original purchase price.
- There may be a residual debt left over after the sale of the applicant’s property. And there may not be. It is all going to depend on a few factors. The questions you need to ask yourself are the following:
- Did the applicant have a deposit when they purchased the property?
- Did the applicant pay extra each week on to the home loan and reduce the balance substantially?
- Did the applicant consolidate smaller debts into the home loan? If yes, were the payments from the consolidated debts added to the weekly home loan payments? (We would have advised them to do this at the beginning of the loan).
If the answer is yes to even one of these questions, then there is a chance that after the loan is repaid there will be no residual debt.