How to secure renovation finance

The reality of property dealings is that, in the vast majority of cases, owners don’t have a buried pirate’s chest full of gold coins they can simply access as needed to complete their dream real estate projects.

The vast majority of owners must seek finance to achieve their wish lists – whether it’s to purchase, build, renovate or develop.

What’s interesting is that while loan basics seem broadly similar across most property and project types, each has its specific quirks – particularly when it comes to renovation finance.

So, what special challenges do you face when securing a loan for your much-desired renovation?

I wanted to get to the heart of the matter, so I called on a talented mortgage-broking associate of mine for a bit of a chat.

Tom Burton, Director at Shore Financial, is at the forefront of seeking finance for clients, and he’s seen it all when it comes to renovation borrowing.

Here’s a few of the factors we came up with in this special reno-loan zone.

Better than buying

One of the main differences between a loan for renovation and one for a standard purchase is that you’re usually not introducing new security to the bank.

Renovation loans are predominately ‘top up’ finance where you’ll be seeking to draw equity from a property that’s probably already used as loan security.

This is a distinct advantage when compared to traditional loans for purchasing because the requirements are less rigorous. The bank will already hold a copy of title, they’ll know about the property’s history and gaining access for an updated valuation will be easy. In addition, the complications that can come with extra people – such and sellers, their conveyancers and other advisors – disappear.

Another big plus is cost savings. New loan applications invariably come with fees and changes that top-up loans don’t.

These are some of the many reasons why a homeowner might choose to renovate their existing home into a configuration that suits their changing lifestyle, rather than hunting for a new property and going through the headaches of purchasing and shifting.

Different loan types

One of the hurdles facing any loan applicant over the past 12 to 18 months has been tighter lending restriction.

Fuelled by the recent Royal Commission into banking and finance, lenders started applying more rigorous loan criteria and tighter serviceability tolerances. They also began forensically analysing household budgets. There were even situations where those pre-approved for a certain amount of borrowing found the bank cutting back their loan amounts or – even worse – rejecting altogether their once acceptable loan application.

While we’ve seen the rules relaxed a little of late, there are still special challenges for borrowers seeking renovation finance.

Firstly, the type of loan you qualify for will be affected by how much your renovation costs.

In general, lenders will have a simplified loan procedure for renovations up to approximately $200,000. If you’re below this figure, then the process of doing a top-up loan is fairly standard and you can often draw down the approved funds as a line of credit.

But, if your costs are above $200,000, the works will likely be classified as ‘structural in nature’, which means you’re looking at construction finance with additional conditions and requirements.

Under this loan application, an owner must provide extra information and documentation including:

A fixed price building contractwith all terms, conditions and responsibilities clearly set out.
An ‘As if complete’ valuation reportprepared by a registered valuer who will assess the end value of the property based on supplied plans, schedules and contracts.
A progress drawdown schedule. This breaks the proposed work into a series of stages, or ‘progress draws.’ They might include stages such as foundation, framing, fitout and final. The schedule assigns a “percentage complete” to each stage. Once a builder has completed a stage, they alert the bank who organises for an independent professional to attend the site and confirm the claimed stage is actually finished. Based on their findings, the banks will pay down the relevant amount to the builder.

As you can see, these additional requirements involve comprehensive documentation and monitoring. They can also bring challenges to the build process. For example, in relation to the progress draws, there are often delays between when work is actually complete and when payment is made to the builder. In some instances, this can slow down the progress of the renovation as the builder needs funds cleared by the bank to purchase materials and pay sub-contractors.

Further challenges

One other element of renovation finance is the chance of cost overruns during the works.

Construction contracts are designed before the project gets underway based on the best available information. However, changes will occur during the renovation. An owner may want to alter plans or finishes, or a site might contain unseen challenges below ground level that require additional costs.

This is where a great mortgage broker is worth their weight in gold. They will ensure the finance amount allows for a contingency, thus ensuring you have extra funds available to offset any unexpected blow outs.

Top tips

So, when it comes to securing finance for your renovation, there are some simple steps to take that will smooth the process.

Firstly, engage a builder who has experience in the renovation field. They will understand bank lending policies and be ready to provide comprehensive documentation with plenty of detail on the building contracts.

Secondly, if you do go for construction finance rather than a line of credit, look for contract clauses that allow for more, rather than less, drawdown stages. This helps keep cash flow consistent for the builder, thus reducing potential delays and aligning the loan amount as close as possible to the build’s progress.

Finally, wherever possible, seek a line of credit facility. It is simply an easier way to have funds at your disposal. You, as the client, stay in control of the dollars and it provides one less layer of involvement (i.e. the bank) during the renovation.

Gaining renovation finance does take some effort, but the rewards are worth it. The result is often that you get exactly what you want in a home at less overall cost than buying an existing property.

Just ensure you use a finance broker specialised in this type of loan structure to guarantee smooth sailing for your beautiful renovation venture.