As much as most people deny it, furniture’s an essential part of our homes. “Uh, no one actually denies that.” Well I did, for three weeks after I bought my house. I slept on rolled up copies of Today until sections of my spine made snapping noises. Only then did I go out and get a renovation loan. You, on the other hand, might want to rush it by covering just four concerns:
What is a Renovation Loan?
We have an earlier article on this, but I’ll summarize:
A renovation loan’s used to give your property a face lift. Use it to hire interior designers, fancy up your walls and floors, repair damaged plumbing, etc.
The standard loan amount ranges from around $10,000 to $30,000, at between 3% to 6% interest per annum. Typical loan tenure ranges between one to five years. In some cases, a bank that issues a home loan may give lower rates on a subsequent reno loan (ask the mortgage specialists at SmartLoans.sg)
Before you rush out and get one though, consider these factors:
1. Don’t Assume It Will Improve Rental Yield
If you intend to be a landlord, you should know most tenants aren’t too concerned about aesthetic renovations.
Most tenants just care about location and maintenance, because they won’t be staying there long. So they’ll pay less if a place is run down, but they probably won’t pay more for marble countertops,fancy walk-ins, etc.
A possible exception to this are high end rental units, such as District 9 condos. The bulk of tenants there are used to having living rooms resemble the Sistine Chapel, so they might pay more for interior design.
But in general, landlords should think about renovating for functional reasons. If the power sockets don’t work or the taps groan like dying buffaloes, then by all means renovate.
But don’t assume it’ll justify a sudden rise in your asking price.
2. Do You Need the Maximum Loan?
It can be tempting to take the biggest possible reno loan. The amounts quoted by contractors or Interior Designers often assume a budget of around $30,000+.
But before agreeing to it, ask what they can do with less. Have your designers come up with proposals on a much tighter budget (e.g. $15,000 or $20,000). You may find it’s still sufficient.
Also, you might want to tighten your belt and get the loan paid sooner. Remember that it affects other loans, such as your Debt Servicing Ratio (DSR) when you buy a car.
3. Will You Need a Furnishing Loan as Well?
In some cases, the maximum reno loan won’t be enough (What the hell are you renovating? The Versailles Palace?)
So now you’ll need more credit for the furnishings (sofa, bed, lamps, etc.). Well you have a range of options, and by “range” I mean from 0 to 1.
Yep, the only bank to offer an additional furnishings loan is RHB. This will get you an additional loan of up to $28,000, at around 6.5% interest per annum. This is on top of the $30,000 cap for the reno loan.
The furnishing loan is better than using your credit card (around 24% per annum). So if you’re certain your reno loan won’t cut it, take this option.
4. Factor in Cash Flow Issues
Hesitate to use a loan whenever possible. But at the same time, consider how will paying out-of-pocket impact your cash flow.
Ensure that, should you pay the whole renovation cost at one go, you won’t be wiping out your emergency savings. Otherwise, you’ll still be forced into high interest credit card repayments when a crisis comes along, and that is far from ideal.
Have you ever taken a reno loan? Comment and tell us how it went!
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