If you made a diorama of my house, you’d get something like a Lego brick a cat chewed on. And the interior is worse; like the dungeon level of an 80′s video game. It all needs a facelift. Problem is, renovations don’t come cheap; and without cash on hand, it’s hard to make the upfront payments that contractors want.
The solution?
A renovation loan. These are trending in Singapore, and in this article, I examine how they works More importantly, I look at the best way to find a renovation loan package:
What is a Renovation Loan?
Renovation (Reno) loans are taken for a number of reasons:
• A change in Interior Design
• Extensive repairs
• Re-modelling of one or more rooms, or of the façade of the house
• Physical extensions of the house
Reno work is either paid in steps, or upfront. Either way, home owners need cash on hand. It’s like a race between you getting money, your designer trying to spend it, and your contractor trying to embezzle everything before you notice.
Sure, there’s always credit cards, but at 24% APR, that’s a step below the local loan shark. Also, renovation costs can easily exceed $50,000, so your nickname at the bank will be “Mr. Maxed” by around week three. Reno loans, on the other hand, average 3 – 5% APR, and won’t wreck your credit score.
How Big is the Loan?
With most banks, the minimum loan is $10,000. Depending on your credit, this can be extended to eight times (8 x) your monthly income, to a maximum of $30,000.
Some banks, such as RHB, also provide furnishing loans. If you want the loan to cover every aspect of your renovation, including the furniture, it’s usual to take a Reno loan and a furnishing loan. This separate furnishing loan is usually capped at $120,000.
So the maximum loan is typically $30,000 (the Reno loan) + $120,000 (furnishing loan) = $150,000. Interior Designers and contractors are familiar with this amount, and this is the budget for range for most designer apartments.
Standard loan tenure is between one to five years.
How Do I Get a Renovation Loan?
You have to:
• Be a Singaporean or Permanent Resident
• Be between 21 – 55 years of age
• Have a minimum income of $24,000 per annum
• Have a fair credit score
This loan is easy to negotiate, so you can sometimes get it even with bad credit. If you’re rejected, either appeal, or try again in six months. And if you can’t meet the minimum income, get a co-signatory. As long as they’re a relative, you’ll get your loan.
Aren’t All Reno Loans the Same?
No. While Reno loans have less variety than home loans, you should still do your homework.
Different banks offer varying interest rates, which hover between 3 – 5% per annum. Some banks also offer perks, such as free insurance protection for your loan.
Shop around and find the lowest loan, via websites like SmartLoans.sg. Remember, the best Reno loan in March 2012 may not be the best in June 2012; so make sure your sources are current.
General Tips on Renovation Loans
Points to note about Reno loans are:
1. Keep the Tenure as Short as You Can -
Unlike home loans, Reno loans can’t be refinanced. If you pick a five year loan, you’re stuck with the same bank for all five years. Also, unlike property, the value of the renovations won’t appreciate. A Reno loan is effectively borrowing money for consumption, and you want to repay the debt quickly.
2. Stretch the Loan to Cover Everything -
Because renovations involve multiple suppliers, it’s easy for the budget to go wrong. When that happens, many home owners end up with credit card debts on top of the Reno loan. You can save money by making sure everything is covered under a single, low-interest Reno loan.
Whatever budget the contractor comes up with, don’t match the loan to it exactly. Make allowances of up to 10%. While the repayments may go up a bit, it’s better than having to open another credit line later.
3. Crunch Numbers First -
Before you get the Reno loan, try to quantify what the improvements will do for you. If you’re a landlord, how will the renovation increase your yield? Is it enough to cover the new repayments?
If you’re just doing it for a more comfortable home, make sure it’s worth renovating instead of just moving. How many years are left on the lease? Are you intending to sell within the next 10 years? If so, remember the renovations may add nothing to your valuation.
Get more Personal Finance tips and tricks on www.MoneySmart.sg
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