How to unlock equity for renovations (including for major renovation projects)
If you’re looking to add value to your home through renovations, you’re likely to need funding to pay builders, landscapers and other tradespeople. So what are some options to access this funding and ‘unlock’ equity from your home without going through the traditional construction loan process?
A great place to start is the definition of equity. If your house is worth $1m and you have a $400k loan against it, you have $600k of equity. Generally, however you can only borrow up to a certain percentage of the property value. Usually, 80% of the value of your home or investment property is the maximum allowed so using the same $1M property and the existing loan of $400K the “borrowable equity” would be $400K i.e. $800K in total being 80% of $1M.
In order to unlock the equity, you will of course need to increase your loan by the amount required. This could be an increase to the existing loan, a separate new loan with the existing lender or you could refinance to a new lender to unlock your equity.
If you’re planning on doing non-structural renovations like installing a pergola or pool, or even landscaping, lenders are typically happy to increase your loan by the requested amount and give you the proceeds as cash in an account to spend as you please. This is one common way we help our clients unlock the equity in their homes.
Equity can be unlocked for a wide variety of reasons but as a risk control, lenders will often seek evidence for the purpose of the funds if above a certain amount. Often structural renovations are a no no and they want this done as a formal construction loan where they control the funds and release to the builder directly in stages. The policies and tolerances of each lender changes frequently so it is always best to check with the Mortgage Experts team before you commit to your plans.
Unlocking Equity for Major Structural Renovations
If you are looking to do a major structural renovation or a knock down rebuild, and you have lots of equity in your land there are options available whereby you could potentially unlock equity to fund your entire building project without needing a traditional construction loan. We will always have a discussion with clients around the risks of having that kind of funding but for the right client the benefits are huge as it means they get to control the funds as work progresses, there is no delay with banks processing complex construction loan applications and no delay with payments to the builder.
Unlocking equity would also suit someone looking to do a quasi-owner builder scenario where the owner is paying multiple trades and there isn’t a main contract so to speak. The other option where this could be ideal is where an owner is using a builder who insists on a cost-plus contract. As above some care is needed and this isn’t the strategy for everyone. Running out of money mid build makes borrowing further funds very difficult.
As we all know, house prices have been soaring nation-wide in recent years. So rather than waiting to pay down your loan in order to accumulate equity, chances are you’ve accumulated equity simply through the value of your home increasing.
If you have a building project, home renovation or other reason to unlock equity, talk to us at Mortgage Experts today to see what is possible.