Renovation finance and insurance
Banks have different criteria for lending for renovation. We explain what hoops you'll need to jump through.
If you’re lucky enough to have owned your home for a few years, you’ll hopefully have plenty of juicy equity to borrow against to create your dream digs.
Most people will look at this refinancing option when it comes time to spend up large on a reno. That’s not to say the banks will automatically throw money at you.
Refinance your mortgage
If you’re looking at refinancing the mortgage, your bank will ask for a few things to cover its end:
- Can you cover the increased costs? The usual shebang with lending is having to show you can afford it. You’ll need a few months’ worth of payslips, bank statements and credit card statements.
- The bank will have the tools to get a value of your home now, but might ask for a valuation of the finished, renovated property. You might need to pay a registered valuer for this.
- The bank might ask for a copy of the drawings from the architect.
- A signed building contract to show it’s all ready to go
- Your builder’s details. Your bank will want their Licensed Building Practitioner number and insurer details.
- Confirmation of resource or building consents (if you need them)
- Proof of insurance. The bank will want to know that the property they’re giving you money for is protected.
Shop around the different banks when looking to borrow for your reno. A competitor might gladly lend you the money – it could even be at a lower rate.
How to structure it
If the job is taking place over months and months, you can set up your loan as a separate offset facility. That way, you only pay interest on the amount you take out to pay for things as they progress, not the total amount of the loan.
The interest rate that’s charged is usually the bank’s floating rate. It’s always higher than their fixed rate, so go in knowing you’ll pay more.
That said, when the job’s done, you should be able to fix at a lower rate.
Construction loans
If you don’t have a lot of equity in your home, another option is a construction loan. Borrowing for these loans is based off the future value of your place once the work is completed.
Rather than getting a lump sum, your bank may exert more control over proceedings. So as invoices come through, the specific amount gets paid directly to the contractor.
While the job is under way you usually only need to cover the interest repayments for a period. You’ll then revert to the usual loan repayments that tackle both interest and the principle when the job is done.
Other options
If it’s a smaller, quick job – you could opt for a fixed, lump sum payout. You’ll still have to jump through the same hoops with the bank, but there’s less management from your end. The money comes through, it’s yours to disburse as you wish, and you start paying it off immediately.
Banks and finance companies also offer personal loans for remodelling, both secured and unsecured. However, interest rates are much higher than those offered for home loans.
If you dip into your savings, just be sure to leave enough to cover the inevitable, unforeseen costs that’ll pop up.
Homestar certification
Consider gunning for Homestar certification when looking at re-doing your place. Homestar is a housing rating tool that awards scores in health, sustainability and efficiency, and is administered by the non-profit New Zealand Green Building Council. Even the lowest Homestar rating shows your home is warmer, healthier, and cheaper to run than your bog-standard place.
Homestar does add a premium on to your build – it’s a whole building certification. So, if you’re only aiming for a better kitchen or bathroom, pull the pin immediately. There are also some non-negotiable thresholds you need to meet that can be expensive installing into an older home, such as upgrading windows and having enough wall insulation.
While pricey, your place will be a much better place to live in afterwards and cheaper to run. Some banks are getting on-board. For example, ANZ offers a home loan package with a discount of 0.7 percent to anyone building or renovating to a Homestar standard.
That sort of discount is not something to be sneezed at. Run it by your designer and see if the odds land in your favour – while unlikely to save you money over and above a bare bones reno, you might be surprised at the small premium required for a much better home.
There’s an argument to be made that a certified home will also attract a premium sales price.
Interest free-loans
While interest rates are currently low, it’s still a better deal if you can reduce the number to zero. Westpac offer an interest-free “Warm Up” loan of up to $10,000 if you spend it on insulation, heat pumps, double glazing, a ventilation system, woodburners or solar power.
Unless your home is the size of a shoe, you’ll be lucky to deck your place out with double glazing for less than $10k. However, that money would go a long way towards a upgrading your insulation or adding a hefty heat pump. There is a catch, it’s interest-free for five years and everything needs to be installed by a pro – so no DIY insulation here.
Contract works insurance
Your normal home insurance doesn’t cover the specific risks created during a construction project. That makes contract works insurance as essential as timber and nails for your reno. Should there be a major storm that rips through while the roof is off and causes major damage, you’ll obviously want to be covered. The financial repercussions are usually well beyond any rainy day fund you’ve put away.
Doesn’t the builder do it?
The builder should have liability insurance – and be sure to check they do before they start. This covers damage to other people’s property caused by their mistakes on site, but usually excludes the actual property they’re working on.
Say they set your house on fire and it also burns down the neighbour’s garage that houses their vintage Porsche. The neighbour gets reimbursed while all you’ll be left with is smouldering ruins.
As the homeowner, it’s your job to make sure you’re covered.
When do I need it?
If your dreams are merely cosmetic – like a lick of paint or fresh carpet – your regular insurance should be enough. That said, you should always check your policy before breaking out the paint brushes, just in case.
Basically, you’ll always need it for structural renovations. These are the major jobs, things like removing load-bearing walls, add on additions and recladding or re-roofing. Basically, if it’ll cost a fortune to fix, it’ll probably need to be covered.
What you’ll need
It’s probably easier to go through your existing insurance company to cut down on the admin when applying for contract works insurance. There’s some crossover with the details that your bank requires.
It’ll ask for:
- Your builder’s details.
- Engineer and architect’s details (if they’re involved).
- Your home’s existing insurance policy – dig up the policy number before calling.
- Whether you’ll be living on site or somewhere else during the job.
- The cost of the renovation. It’ll also calculate potential variations and demolition fees if something should go wrong, but that’s usually based on a percentage of the total contract price. If you have a difficult site that’ll make these sorts of things more expensive, you might want to up the values.
- The particulars of what’s happening on the job. Are the exterior walls or roof coming off?
- Have the required consents been obtained?
What doesn’t it cover?
As is the norm with insurance policies, there’re exclusions from cover you need to know about.
If your builder has done a dodgy job and hasn’t built to code, it won’t be covered. Same goes for usual wear and tear failures of materials. The usual wording tends to include “sudden accidental loss” – that’s the big stuff like fires, floods or storm damage and vandalism and theft.
Review your insurance after renovating
All going well, your place should be worth a pretty penny after you’ve finished tarting it up. If you done some bespoke work to the place, you’ll know full well just how expensive it was to build in the first place. That also means it’ll probably cost more to rebuild should something catastrophic happen.
Your old sum that you were insured for will be out of date. Don’t forget to redo the calculations and up your regular home insurance after your reno has finished so you aren’t left short, and the potential rebuild will be fully covered.
If you’ve splurged on a new lounge suite or flash piece or art to finish the look, the value of your contents would’ve risen as well. Check you’ve got enough there to re-buy everything should something happen.
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