Should you borrow to renovate or save?
We work with a lot of clients who have a long-term goal to renovate their house. Renovating can be a great way to improve the value of your house whilst also improving the benefit you get from living in it.
But once you’ve made the decision to renovate, what should you do? Should you put the money aside each week until you’ve saved enough or do you simply borrow more?
A lot of people think that renovating is a zero-risk game but are ignoring some pretty obvious issues
I regularly meet people who think that renovating is a zero-risk game. That by borrowing the money, they increase the value of their property by the same amount, so there is no reason not to borrow. But this ignores some pretty obvious issues.
Putting aside the fact that your renovation may not increase the value of your home by as much as you borrow, by increasing your mortgage, you are going to be a lot worse off financially. That is because you will be required to pay interest on this additional loan and that interest amount is going to compound over time. How much interest? Check out MoneySmart’s Mortgage Calculator to see how much interest you will end up paying over the life of your loan.
This means overall less money for you.
Alternatively, if you save the money, not only do you avoid paying interest, you can actually earn interest or investment income!
Nothing in life is black and white and you’ll need to do what is right for you. For some of our clients, this is to borrow. For others this is to save. For others, it is to do a combination of both. There are a lot of different options and what suits you will depend on your income, your expenses and your other goals and commitments.
If you are looking to renovate and are looking for someone to help paint the way for your individual circumstances, please get in touch. As always, let me know if you have any questions.
This post is from our resident Financial Planner Ben Brett, check out his details in the About Us section.
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