It’s the classic dilemma for home-owners after a few years of living in a place that you love. Right home, right location, it’s just not big enough. You need an extra bedroom, the kitchen is too small or the bathroom's looking a bit tired.
You don’t want to move, after all that’s a very costly thing to do, so you look to adding on or renovating. How then to pay for the extension, a makeover that may set you back up to $50,000?
If you’ve got some equity in the property - the difference between what you paid for it, the mortgage you have on it and any increase in the value of your home - then you might be tempted to put the renovation costs on your home loan. On the face of it and taking a short term view, it sounds like the right thing to do, especially when mortgage interest rates are historically low.
But look a bit longer out and you could find yourself seriously out of pocket in terms of the much higher interest payments you will end up paying. Within a few years, that could be the equivalent of a number of smart new appliances - oven, fridge, cooktop and dishwasher - to spruce up that re-vamped kitchen when compared to the repayments on a personal loan.
It works something like this.
You’ve got a $20,000 budget to put in that new kitchen (love the idea of the stone bench tops, the bigger pantry, the extra cupboards and the soft-touch opening drawers). The rise in the value of your property (plus the extra bit you’re looking to add from the makeover) can easily accommodate the top up on your mortgage and the couple of hundred dollars a month in extra home loan repayments can be comfortably covered off by you and your partner.
Sounds good so far, especially as you are pushing out the the repayment terms over the 20 years left on the mortgage. You’ll hardly notice you tell yourself. And for the first 12 months or so you don’t. However, when you start adding up the extra monthly sum and multiply it by another 19 years, that’s when you discover the total amount you are forking out becomes the equivalent of a few more luxury extras around the home.
Take, for example, a $500,000 mortgage (not out of the ordinary these days) to which you’ll be adding $20,000. Based on a variable home loan rate of 4.7% that would be an extra $130 a month.
Not bad, you think. Until you work out that’s around an additional $10,900 in interest payments at current rates over 20 years.
Now compare that to a SocietyOne personal loan of $20,000 paid back over 5 years at a fixed term interest rate of 10% - which could be even lower if your credit history is good. Your monthly repayments are, of course, much higher - in this case $438 a month.
But, you’ll only be paying $6260 in interest over that 5 years which is, in effect, $4,600 less than what you would be loading up onto your mortgage and 15 years with lower payments!
And given that you’ll almost certainly need that extra money by the time you pay off the personal loan (having also got used to the repayments) that will give you a lot more flexibility to get the next big purchase you may want by then.
To learn more about how SocietyOne can help you pay for your home renovations visit our home improvement loans page