To loan or refinance: Make the right choice when renovating your home
For those needing financial support to get started, 2 common options are personal loans and home loan refinancing. But how do you know which route is suitable for your project, budget, and long-term financial strategy?
To make informed, responsible decisions, it is imperative for homeowners to know the key differences, pros and cons, and ideal use cases for each financing method.
Understanding the options
A personal loan is typically an unsecured loan that has an assessed interest rate and term and ranges from 12 to 72 months. Approval is based largely on your credit score, income, and expenses, and the funds can usually be accessed fairly quickly.
By comparison, procuring funding from your home loan may involve more steps, depending on the option selected.
You can either apply for a further loan (which is new money borrowed against your property's increased value and would require you to get a new bond) or a readvance that lets you reborrow funds you've already repaid into your original bond.
Both increase your loan but follow different processes. The bank will need to perform a credit assessment on you for both these options.
Pros and cons of using a personal loan
A personal loan is best suited for smaller-to-mid-sized projects (e.g. kitchen remodelling, new flooring, painting, new appliances, furniture, adding a carport or garage). It is also ideal for homeowners with lower home equity (the difference between your property value and the amount you still owe on your home loan) or who want to avoid refinancing their home loan, and for home projects that require quick turnaround where time is of the essence.
The application process is simple and speedy with no collateral required, and the fixed payment schedule makes for easy budgeting, with predictable repayment schedules. However, borrowers with average credit scores attract higher interest rates due to their riskier credit profile. Personal loans are typically capped based on income and other factors, and monthly repayments may be higher due to shorter repayment periods.
Pros and cons of refinancing a home loan
Refinancing, particularly through a further loan, is typically suited for larger projects like structural upgrades. However, a readvance can also be ideal for smaller projects when clients have extra funds in their home loan account from paying ahead, enabling faster access with competitive interest rates.
In contrast, the processing times are longer as credit assessments and approvals can slow the process. Upfront fees are typically higher than for a personal loan and you may increase your total debt exposure and likely your repayment term.
What's more convenient?
Personal loans offer convenience with a quicker turnaround time due to no collateral validations and limited paperwork needed to be produced. They're a better fit if you want to avoid reworking your mortgage, especially if you're on a fixed-rate loan with a great interest rate.
Procuring funds from your home loan makes sense when your revised interest rate is reasonable, and you plan to stay in your home long enough to recoup the associated costs. It's a strategic move if you're planning significant home upgrades and want to leverage your home's value for long-term financial benefit.
Weigh your options
There is no one-size-fits-all answer when choosing between a personal loan and refinancing your home loan. It ultimately depends on your financial health, the size of your project, and your long-term goals. Personal loans offer quick access to funds and a simpler application process, while refinancing your home taps into long-term value at lower rates. The key is to weigh short-term convenience against long-term cost and equity.
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