People often feel it’s easier to buy a home than to renovate one. When you’re buying a home, you already know how much it is going to cost you. But a renovation can be difficult to assess in terms of cost. Once you start renovating, you’ll find all the new things you didn’t realise needed repair, sending your renovation bill higher.
Renovation requires lots of patience and planning in order to cut costs and get the work done as per your timelines and quality. When it comes to planning and managing money during your renovation, there are some things you can keep in mind. Let’s explore them in this article.
What do you want to achieve during the renovation?
You must determine what all you intend on achieving during a home renovation. The process can include changing the floor surface, wall painting, adding a room to your house plan, restructure bathrooms, removing or building a wall, overhauling the circuits, adding a false ceiling, etc. The list could go on and on. But it’s important that you stick to what’s truly important and avoid the frivolous. This would prevent you from over-spending.
Plan each renovation stage and its expenses
Once you’ve finalised a list of renovation tasks, you can segregate them as per their nature. For example, all construction works can be done in one stage, all plastering and painting at another, and all electrical fittings can be installed at another stage. You can determine the timelines and costs of each such task. It is advisable to budget on the higher side of the expected expenses. You may find actual expenses to be 5-10% more than what you had expected. Now, you have the option to assign the complete work to a renovation expert on contract, or do it yourself by hiring experts for each task. Both options have some merits and demerits. You can compare the rates you calculated and compare them with what the experts are offering, and decide on an option as per your comfort and budget.
Plan the financing
After planning the renovation and your expenses, you must now decide how you’re going to raise the money needed. If you have the fund ready in hand, you can go straight to executing your plan. But if you are short of cash, you may have to borrow. Banks allow various loan options that could be used to renovate your home. Let’s discuss these options one by one.
Home renovation/improvement loan
This is the straightforward loan option for people looking to renovate their homes. The advantage of a renovation loan is the low interest rate, long tenure of up to 15 years, and eligibility of tax exemption under Sec 24 (B).
Normally a bank allows a loan up to 70-90% of the total fund required for renovation. Your property is held as collateral against the loan. Most of the banks have waived off prepayment penalty on this loan. If your loan amount requirement is big, you can opt for this loan option. Else, let’s have a look at the others.
Home loan top-up
If you are currently repaying a home loan, a top-up loan could be a good option for you for the renovation. The interest on loan top-up is low, close to the interest rate on your home loan. The amount you can borrow depends on the equity value of your home. Banks normally allows up to 70% of the equity value a top-up loan. It works similar to a personal loan, but the top-up loan has a lower interest rate and it is a secured loan as the home is already held as collateral. This is an easy and quick option, but it’s available only to those servicing a home loan.
Loan against property
Taking a loan against property, you are not restricted to using the fund for a specific purpose. You can use it as per your wish. The interest rate on LAP could be slightly higher than of a renovation loan. As the name suggests, for availing an LAP, you need to keep the property as a collateral with the bank. Once you place the collateral, you can’t raise further loans against the property till you clear your existing loan.
Therefore, you can consider an LAP if you are looking to raise a big amount. Suppose you want a loan of Rs. 10 lakh whereas your property is valued at Rs. 1 crore. It is not be worth mortgage the whole property for a comparatively small amount because it will block the remaining equity value of your property.
The other loan options
The other options you could explore are personal loans, gold loan, or a loan from friends or relatives. Personal loans have a high interest rate, especially if your CIBIL score is towards the lower end of the eligibility scale. You can think of the personal loan option if your fund requirement is small and if you have no other option available.
A gold loan could be useful if you want to unlock the value of your idle bullion assets. The interest rate is higher in comparison to a top-up or LAP but lower than a personal loan.
If you can get a lower interest loan or interest free loan from friends and relatives, you can explore the option, provided you can repay it as per the terms you agree upon.
To sum it up, it is wise to plan your home renovation and its expenses. You can invest small amounts every month in a recurring deposit or liquid mutual funds and use it for the renovation after a few months or years. If you have decided to go for a loan, a home loan top-up or home improvement loan should be preferred over other options.