Mortgages for home renovations
Whilst many buyers want a home that they can move straight into with no hassle or stress, others prefer buying houses which they can renovate and style to their taste. Although renovating can be great for couples, families who want to change aspects of the houses design or layout, investors are also attracted to ‘renovators’ as they are generally much cheaper than properties that don’t require any repair work. However, if you found the perfect house to renovate, will the banks still lend to you, despite its current state. Read on to find out more.
Can I borrow if I plan on renovating?
Most banks and lenders have strict lending policies and guidelines. As a result of their conservative lending practices, they are less inclined to lend to borrowers who are using a dilapidated property as security, despite your intention to renovate.
Why do the banks view ‘renovators’ this way?
Homes that need extensive repairs are valued less than finished dwellings for obvious reasons. As such, if you were to buy a property with the intention of renovating, and then run out of funds during the renovation, or simply decide not to continue, not many people would be willing to buy this property. Accordingly, the risk of loss for the banks would be high. Luckily there are still some banks that will lend to those who want to renovate.
How much will the banks lend?
If you have bought a property and then decided not to renovate, you may be entitled to borrow 80% of the property value. However, this largely depends on the current state and condition of the house.
Where the property needs on minor renovations, most banks will allow you borrow up to 90% LVR. However, where the repairs are small cosmetic renovations to add aesthetic value to the property you may be entitled to borrow up to 95% LVR, plus additional funds to pay for the renovation.
If the property that you purchased requires extensive renovation, the banks may lend you 80% of the purchase price. However if you have hired a builder, this amount may be increased to 95% LVR, as well as the cost of renovating.
However, where you have to knock down and rebuild the existing home, the banks will not include the value of the property and you will generally be entitled to borrow 90% of the land value, plus costs of building, if you have hired a builder.
If you are considering doing the renovations yourself, without using a licensed builder, then you may only be allowed to borrow 60% LVR, plus any funds needed to finance the renovation.
What if I’m a low doc borrower?
There are quite a few lenders that will only allow you to borrow 60% of the purchase price. However, some banks will increase the amount you are able to borrow, to up to 80% LVR, plus the cost of building.
Remember!
The amount that you can borrow mainly depends on the type of home you and buying its current condition. This is one of the main factors that the banks take into account when lending to borrowers who wish to renovate.
Where the property is in such a good condition that it could be put on the rental market, you may have a better chance of a lender that will use general lending guidelines. You may be entitled to borrow up to 100% of the purchase price! If you are a low doc borrower, this amount is reduced to 80% LVR.
Risks involved in renovating
Taking on a home renovation involves an element of risk. This is why you need to ensure that you have budgeted correctly and borrowed enough to cover any added costs. If you cannot finish the renovations without additional funds, you are likely to encounter issues.
The house will be difficult to sell, or will sell undervalue, resulting in significant loss to the banks. This is why you need to plan everything out before taking on a project. If you do, things are more likely to go smoothly and you can start custom designing your own home or fix it up to sell for a neat profit.
