Should You Use a Personal Loan or Refinance for Renovation Plans?
Almost half of all Australian homeowners carried out some form of renovation in 2021 and 2022. In 2023, this renovation trend is seen to continue, with people renovating homes due to rising housing costs and aging homes. This leads to the big question people ask before embarking on such a project – should they refinance for renovation costs or should they take out a personal loan for this?
Australian homeowners have a range of finance options available when planning a renovation. This includes personal savings, government grants or a range of different loans. Two of the most common finance options are personal loans and refinancing to access equity. A homeowner’s financial situation and the proposed cost of the renovation will usually be the biggest factors to consider when choosing between a personal loan and refinance for renovation expenses.
There are some great benefits to a refinance for renovation plans. These include:
- Lower interest rates: By refinancing, you’ll not only have access to lower interest rates (compared to the average personal loan), but you may also be able to reduce the amount of interest you’re currently paying on your home loan.
- Ability to access home equity: You may be surprised at the amount of usable equity your property has built up over the years. Refinancing allows you to use this equity to add further value back into the property.
- Consolidation of debt: Rather than financing your renovation across multiple forms of credit, refinancing allows you to consolidate all the costs. This simplifies debt management and may result in you paying less interest overall.
- Adjustable loan term: Refinancing gives you the flexibility to change your loan term. This means you could potentially shorten the mortgage for quicker debt repayment or extend it to lower your monthly repayments.
- Fixed or variable rate options: Unlike a personal loan, refinancing allows you to choose between fixed and variable interest rates. This means you can pick the option that suits you best, whether that’s greater stability or flexibility in your repayments.
The Benefits of Using a Personal Loan for Home Renovations
When choosing between a personal loan for renovations or a refinance for renovation costs, it’s a good idea to examine the various pros and cons. Some of the benefits of using a personal loan for a home renovation include:
1. Quick approval: Personal loans often have a relatively quick and simple approval process. Many lenders now offer an online application process for personal loans, and you can receive a decision within a few business days.
2. Fixed interest rates: One of the big differences between a personal loan for renovation costs and a refinance for renovations is that personal loans usually have fixed interest rates. This means that the interest rate remains the same throughout the life of the loan, so your monthly repayments won’t change. This can make it easier to budget for the ongoing costs of the renovation.
3. No need to use your home as collateral: Because personal loans are unsecured, you won’t have to use your home or any other assets as collateral. This eliminates the risk of losing your property if you ever struggle to make repayments in the future.
4. No equity required: A personal loan doesn’t require any usable equity as a prerequisite for approval. This means a personal loan may be more achievable for a new homeowner who hasn’t yet had time for their property to increase in value.
Choosing Between a Personal Loan and Refinance for Renovation Expenses
If you’re trying to decide between personal loans vs. refinancing home loan for renovations, then start by finding answers to the following questions:
- Which finance option offers the lowest interest rate?
- How will the various loan terms affect your monthly repayments and the overall cost of the loan (including total interest paid over the life of the loan)?
- What are the risk factors involved in each of the finance options under consideration?
- How long will it take for the loan to be approved and finalised?
Get Expert Advice on Which Loan Suits Your Situation
Ultimately, choosing among options like an upgrading or downsizing loan, a cash-out refinance, and a personal loan should come down to what is best for your financial situation and future goals. A homeowner who needs quick funds and who has minimal equity may find that a personal loan is the best option. Alternatively, a borrower with substantial equity could be far better off choosing a cash-out refinance or a renovation loan. To ensure you make the right decision, you need to start by getting the right advice.
The experienced team of mortgage brokers at ZEP Finance can provide expert recommendations tailored to your specific financial situation. We’ll happily answer all your questions, compare loan options from a wide panel of lenders and offer unbiased advice based on what’s ultimately going to be best for you. To get started on your dream renovation, book a phone appointment with ZEP Finance today.