Money RULES

The Big Reveal: 6 ways to PAY for a home makeover

By Jason Bryce

Australia has home reno fever.

The Block and House Rules are two of Australia’s favourite TV shows, with millions tuning in each week for the latest winners and room reveals.

And home reno fever is set to grow.

A record number of detached homes in Australia are now approaching 30 years old says economist Shane Garrett from the Master Builders Association.

That means they probably need at least a new kitchen or bathroom and possibly a complete makeover.

“Our forecasts envisage that the market for major home renovations will grow from $8.97 billion in 2018/19 to $9.38 billion in 2023/24.”

So more and more Aussies will be renovating in the next few years, watching home reno programming and hanging out at Bunnings on Saturday morning.

But this obsession doesn’t come cheap. Home renovations typically cost thousands of dollars. Even a bargain basement room makeover can cost many hundreds of dollars.

Understand what you are getting yourself into, otherwise your reno dream could become a debt nightmare.

1) A great savings account 

Nana says if you don’t have the money, you got no right to buy the thing. It’s old fashioned advice but still worth its weight in gold. A good savings account will help you build up cash and there no fees to eat away at the balance.  An offset savings account can also help build up savings if you have a home loan offering that feature.

For example, MyState’s Bonus Saver account is available throughout Australia and offers a maximum rate of 2.50 per cent pa when you deposit at least $20 per month and make 5 transactions on a linked account (other terms and conditions may apply).

The RAMS Saver is paying a maximum rate of 2.55 per cent pa when you deposit $200 per month ad make no withdrawals (other terms and conditions may apply).

2) Buy Now, Pay Later

There is a growing number of Buy Now, Pay Later services competing for the attention of Australians.

Both Zip and Afterpay are promoted heavily as payment options for home renovators. Both work well for people looking to purchase furniture, fittings, wall and floor coverings, equipment and materials.

But both have serious limitations for renovators.

What is Afterpay’s maximum purchase amount?

Afterpay is the biggest Buy Now, Pay Later provider in Australia. Launched four years ago, it now claims one in four millenials as customers. Afterpay’s average purchase size is $150 and the average balance outstanding on a customer’s account is $208. Afterpay’s maximum allowed single purchase is $1,500 and the maximum outstanding balance is $2,000.

What is Zip pay and Zip money’s maximum purchase amount?

Zip has two levels of membership – Zip pay and Zip money.

Zip pay is the entry level service with zero interest and zero establishment fee. Zip pay will assign you a credit limit based on your application of $350, $500 or $1,000.

Zip money charges interest and offers purchases over $1,000. Zip charges a $6 per month account fee, waived if the balance is zero. Users can apply to have their credit limit increased to $5,000 or even more.

Is there an alternative to Afterpay and Zip?

Yes. Another Aussie Buy Now, Pay Later service is directly targeting consumers in the home reno demographic, rather than young students and millennials.

Openpay, like Afterpay and Zip, offers buyers the opportunity to take their purchase now and pay for it via instalments. But Openpay supports larger purchase amounts and longer repayment periods.

“Our main points of difference are flexibility and longer plans,” Michael Eidel, CEO of Openpay told InfoChoice in July.

“Customers can choose a plan from two – 36 months and limits up to $20,000 – with no interest.

“We operate heavily within the automotive and health verticals as well as home improvements where purchase amounts are typically higher,” said Mr Eidel.

“It’s here that we can offer a solution for responsible customers who are looking to manage the ongoing costs associated with these purchases, whether it be for a car service, a dental procedure or a kitchen renovation.”

3) Great credit cards for home reno projects

When making a few large purchases on a credit card, the purchase interest rate is all important. Assuming you won’t be repaying the purchases within the interest-free period means you want as low a rate as possible.

Average credit card rates are around 17 per cent pa. But there are cards available now with purchase rates under 10 per cent pa.

For example, the Bankwest Breeze Mastercard has a purchase rate of 9.90 per cent pa and an annual fee of $99.

The Community First Low Rate Visa credit card has a purchase interest rate of 8.99 per cent pa and an annual fee of $40.

4) Personal loans for home reno

Personal loan rates are often lower than credit card rates and are designed to finance single large purchases, rather than be a continuing line of credit.

For example, Harmoney’s Unsecured Personal Loan has rates starting at 6.99 per cent pa (comparison rate 7.69 per cent pa) on loan amounts between $5,000 and $35,000.

If you’re buying something green and sustainable for your renovated home, First Option Bank’s BeGreen Loan is charging 6.99 per cent pa (comparison rate 7.23 per cent) on loan amounts between $2,000 and $30,000.

5) Redraw your home loan

If you are ahead on your home loan repayments, you can consider making a redraw, if your home loan allows it.

Redraw means accessing the equity in your home – and increasing the amount of money you currently owe. You are withdrawing some of the money you have already repaid on your home loan. You will have to repay it at the interest rate being charged on your home loan.

Redraw is a mortgage feature but is available on plenty of low-rate, ‘no-frills home loans. For example, Move Bank’s Straightforward Home Loan has a comparison rate of just 3.12 per cent pa, application fee of $450 and features redraw.

UBank’s Discount Offer for Owner Occupied Variable P&I (over $200K) home loan has redraw with a comparison rate of 3.09 per cent pa.

6) Refinancing

Refinancing to a new loan and (perhaps) a new lender, can not only save you thousands of dollars but may also let you add in other debts and expenses to your mortgage.

And mortgages for refinancers are very competitively priced at the moment.

For example, Athena’s Owner Occupier Principal & Interest (Refinance Only) has a current comparison rate of 3.05 per cent pa.

Gateway Bank’s Low Rate Essentials (up to 80% LVR) has a comparison rate of 3.22 per cent pa)

However you pay for your reno, being on top of the finances is way more important than choosing between aqua pastels for the shower recess.

Have fun with your reno, don’t create a financial problem for yourself down the track.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.

Notes:

Rates are headline rates at the time of publishing, not comparison rates, fees not included.

Rates based on owner-occupier, variable rate, principal and interest 25-year, $300,000 loan amount with a package.

Comparison rate is based on a secured loan of $150,000 over the term of 25 years.

WARNING: These comparison rates apply only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and costs savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan