How to get the bank to pay for your renovation?
This is the method that we use and it works well for us. However before using this method you should speak with your financial adviser, accountant, etc to completely understand how it works and suit your needs.
Here is how it works. You have a house, and have some equities in it. You go and see the bank and ask them can you borrow the money to the maximum LVR. This could be 80% to 95%. Yes I know, you need to pay mortgage insurance if you go above 80%, but work it out with your accountant, this may give you the additional funding you need to finish the task.
Let’s say, the house is worth $500k and you have a loan of $350k already. Your equity is $150k. If you borrow 80%, you can get $50k out, if you borrow 95%, you can get $125k out. Say mortgage insurance is around $20k, you still net $105k. All you need to do is fill in one of those ‘Show me the money’ form from the bank. Simple…..
Great power comes with great responsibility. What you do next is to use that $105k wisely, I need to stress ‘wisely’. Your house worth $500k so the theory is spend a maximum 10% of the property value for renovation. Therefore, maximum renovation cost is no more than $50k.
This $50k should be able to give you a complete renovation, this includes a new kitchen, bathroom, wardrobe, new carpet / floor, paint, etc. Some of you may already say $50k can’t do that much, believe us, yes it can, do your research and call heaps of trades for quotes.
The tricky part with this formula is, what to renovate to obtain a maximum return, this is where you need to speak to an experienced renovator or visit web sites like ours.
Once you have completed the renovation, your house will increase in value. I am looking at the new value of the house should be worth $650k at the minimum. If your money spent can’t generate three folds after the renovation, you may be better to leave it.
So, what to do with the loan left ($55k), use this $55k to pay for the loan interest itself. This sounds silly but this will end up costing you nothing to renovate the house and it will last you a good 5-6 years.
We are in the process doing exactly the same but we are doing it on our investment properties. We are also taking this to the next level, we use bank’s money to purchase a property to renovate. None of our own money.
This could be a bit hard to understand at this point. However, if you speak to your financial adviser or accountant, they should be able to explain it to you on a flip chart.
Finally, we are not financial adviser and we are only sharing with you about our experience. Get your own advice before taking any action.
On the other hand, if you need someone to guide you on how to renovate, please feel free to contact us and we are happy to share our experience.
We have done a lot of reading to get to this point plus practical experience, Michael’s book also explain the process should you need more information.
