Property

Putting a house on the market in the hope that you will receive the price you need for your next home can be a stressful experience.

Lenders and mortgage brokers are noticing a trend towards renovating rather than upgrading as people opt to protect their financial position and adapt to market conditions.

“People are seeing too many properties not reach their reserve price and have decided that if they do buy and sell, there is too much financial uncertainty for them to proceed with an upgrade,” says the chief executive of Resi Mortgage Corporation, Lisa Montgomery.

Stamp duty

For these borrowers, it’s now a case of making do with what you have, rather than looking for a new project. Much of it comes down to affordability, particularly when you factor in the cost of stamp duty on any new property purchase.

“When you crunch the numbers on the cost of upgrading and factor in the possibility of a black hole of funds from a disappointing sale price – as well as the cost of stamp duty – it very much comes down to deciding if you have to move, versus how much risk you are prepared to take,” Montgomery says.

Of course, there is nothing straightforward about renovating. Depending on what you are trying to achieve, there may be a need to engage architects and a specialist builder and seek council approval.

Then there is the risk of a cost blowout when the builder discovers the need to carry out additional plumbing work or, even worse, the builder going broke on the job.

Staying put

“Australians, by our very nature, have a ‘what’s next?’ attitude to life,” Montgomery says. “So this latest property trend to renovate still satisfies the thirst for a new project but within an existing environment.”

It’s not difficult to make the decision to stay put – provided you’re happy with the infrastructure and community within your existing surroundings.

Factors influencing your decision will be the quality of the local schools, transport, shopping centres and even your neighbours.

The next question is: what can you do to the property in terms of improving it to meet your changing needs? And how much do you want to spend on renovations?

Adding another storey or knocking down and rebuilding a large portion of your home will require significant funds, which can either result in a large redraw on your loan or a total refinance.

Obviously, knocking down a few walls to create extra space or updating a kitchen will cost far less.

Find your funding

If you need to borrow to complete your renovations, make sure you have sufficient funding before you start, says the corporate spokesman for home finance broker Loan Market, Paul Smith.

Banks will insist on a fixed-price building contract for “major and significant” renovations such as adding a second storey to a property.

For smaller renovations, such as kitchen or bathroom upgrades, banks are more lenient but the pitfalls remain the same, Smith says.

First is the issue of the renovation, or the new appliances you want to go into the home, being more expensive than originally planned. At which point you need to ask whether the bank is prepared to lend you more so you can complete your work.

According to Smith, over capitalisation can be an issue, especially when a major renovation is planned.

For many people planning a smaller renovation, the most important thing will be that they get what they want. Potential buyers will value the gold-plated taps in the bathroom appropriately.

You also need to check whether you need approval for the renovation from your local council. It is not unusual to rely on advice from friends and neighbours to work out whether you need to seek council approval or not, Smith says.

That’s not a problem – until the property is up for sale again and the prospective buyer starts checking council approvals for a pergola, shed or carport.

Case study: Borrowing to renovate builds value

Aaron and Leanne Sainsbury looked seriously at selling their home of 11 years in Sydney’s south-west and buying a place closer to the city.

It would have meant disrupting their children’s social network and spending $75,000 on the real estate agent’s commission, legal fees and the stamp duty on a new purchase. “We thought about what the place we live in would look like if we spent the $75,000 on it,” Aaron says.

“It seemed to make sense to stay put and spend the money making it more comfortable and adding value.”

The Sainsburys are halfway through repainting the house inside and out, updating the carpets, window furnishings and lighting.

Because there were no structural changes, there was no need to involve the lender in any of their plans. Furthermore, because Aaron is a mortgage adviser with Smartline, he knew which lenders would advance them the money to use as they wished.

“One thing people do need to consider when approaching a lender for a loan for renovating is who will have control of the funds,” he says. “It is better to get the money and spend it how you wish. If there is construction involved, some lenders will insist that they control the flow of funds.”

The Sainsburys have yet to carry out improvements to their outdoor area but an initial appraisal of their home suggests they have already added between $20,000 and $40,000 to its value, with the final figure estimated to be up to $80,000.