Advice for renovations finance please

[wokka59]

My wife and I live in a property worth 1 mill with 245000 on an interest only loan.We have another IP worth 1.4mill with 368K owing with another interest only loan. We have 385K available in another account. We plan to renovate the IP in 2017 and then move in, making our current PPR the IP. The renovations are expected to cost approx 500K. What is the best way to finance the renovations? TIA everyone

wokka

 

[Jess Peletier]

I would access some equity in your current IP for the reno, and keep your cash in an offset account against whichever debt is non-deductible at the time.

 

[Shahin_Afarin]

You need to do an equity release.

What it will come down to is what you declare as the specific purpose to the lender.

If its for renovation of that magnitude then its bound to be structural reno and not a cosmetic reno in which case the lender will want to control the funds just like a construction loan. I assume this is not what you want to do so be careful how you structure the loan.

Ensure that its a separate facility so you keep your loans nice and clean and do not contaminate any tax deductibility of the existing loans.

 

[peaches]

Just to further clarify - the lenders will consider it a substantial renovation if there is any change to to the roofline: ie extensions, new room, new level etc.

The biggest trap is if you run out of funds before completion especially if you have not disclosed the plans to the lender ( read your mortgage contract). Lenders are not impressed where borrowers take a hammer to their security without permission.

What's more if you run out of funds and the house is not fully habitable you may not have the option of refinancing as very few lenders want to finance incomplete work and this means you are left having to negotiate with your existing lender.

 

[Jamie M]

Yep - agree with Peaches above.

I guess the good thing with OP's scenario is there's no shortage of equity - so assuming it can be serviced, running out of funds should be mitigated.

Cheers

Jamie

 

[Peter_Tersteeg]

The best way forward really depends on the extent of the renovations.

If it's generally cosmetic or fairly small scale, then an equity release is probably the best and easiest way to fund it. Do your budget carefully, have a healthy surplus and you should be fine. Given your equity position it should be possible (but painful) to go back to the bank for more as long as the property is habitable during the process.

A larger scale renovation generally is best funded by a construction loan. You'll need a fixed price building contract with a registered builder which the lender will fund against.

The best way to determine which is the more appropriate route is to be upfront with your broker or lender and be clear on what you're planning to do.

For a $500k reno, I think it's going to fall squarely into the construction loan category. I wouldn't be doing something on this scale using an equity release.

 

[Paul@PFI]

My wife and I live in a property worth 1 mill with 245000 on an interest only loan.We have another IP worth 1.4mill with 368K owing with another interest only loan. We have 385K available in another account. We plan to renovate the IP in 2017 and then move in, making our current PPR the IP. The renovations are expected to cost approx 500K. What is the best way to finance the renovations? TIA everyone

wokka

As the extent of reno's seems major the cost would be capital expenditure on the former IP / new PPOR. There would be little if any tax benefits as the depn and cap allowances wouldn't be deductible v's rents and interest would be same.

Its wouldn't really matter how you finance them as long as its a separate loan since the new borrowing interest and the costs themselves aren't deductible when its a IP. The use of the property etc isn't relevant. Just what the $ were used for and the use of that property. So if its a PPOR none are deductible.