Add value with a home renovation

Latest official figures show Australians continue to focus on renovating homes to build value, and the prospect of improving our properties is inspiring us to save.

A recent study by mortgage provider Loan Market has revealed that about two in five home owners are saving for a major renovation this year.

Along with investors, generation Y first home owners were among the keenest would-be renovators, with the latter opting for property in need of some improvement or repair at the lower end of the price scale, the study found.

“They’re often buying smaller units which have undersized or no backyards and are much easier to renovate because of the size of the unit,” said Loan Market corporate spokesman, Paul Smith.

Renovating can be a great way to add value to a property. But it’s important to understand the pitfalls, because even the most careful renovations can devalue a home.

Finance expert David Koch, says the problem arises when the property value doesn’t rise to meet cost on the renos. He recommends setting a budget and sticking to it.

“Work out how much you can afford to spend before you get too excited about the value a renovation will add to your house,” he said.

“Don’t overcapitalise. Get a couple of agents to come to value your house, tell you what you can do to improve the price and give you an idea of what it would be worth after the renovation.”

As a rule of thumb, property experts recommend capping renovation spend at 10 percent of the value of the home. So if your property is valued at $400,000, you’d be wise to limit your budget to a maximum of $40,000.

Then you’ll need to find the cash to pay for it, says Money magazine editor Effie Zahos.

“Of course the best way to fund renovations is through your savings. That way you won’t pay interest on the work you do, which makes your profit margin all the sweeter,” she said.

But it could take several years to save up a renovation kitty, if you put away money each week in a savings account. An easier and faster way, she says, is to redraw any equity out of your home loan.

“But take care. Borrowing an extra $25,000 on your mortgage may only increase your repayment by $45 a week, but over 25 years that can add $40,000 to your total interest bill,” she said.

Other finance options, she adds, include topping up your existing home loan, taking out a second home loan or a personal loan and even whacking it on your credit card. Whichever option you choose, though, it’s important to do your homework and compare your options using a free comparison site such as RateCity.

Finally, Koch suggests getting in the experts to do the job and “hiring smart”.

“Try to get at least three written quotes. Give each company the same information to make sure you’re comparing apples with apples. Make sure you get a total price that includes all work to be done as well as materials,” he said.

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