You have secured yourself a home, which may include a beautiful garden or patio, and an interior you’ve decorated to your unique taste. But what if you’d like to upgrade it even further?
One option is to take out a personal loan and use this money for renovations. We consider whether this is a good idea, and we look at an alternative.
Tip: Wondering how much you’d pay for a home loan? Find out with our home loan calculator.
Using personal loans for renovations
According to Reagan Mitchell, director of WealthyMe, taking out a personal loan for home renovations is the most expensive of all credit options.
“Personal loans are unsecured loans, which means that they have very high interest rates,” Mitchell points out. “An unsecured loan means that there is low security for the bank to recover the funds should you be unable to repay the loan, thus a higher risk and a higher interest rate.”
However, if you only plan to do small renovations, a personal loan may be the right choice for you.
He explains that the rule of thumb when taking out a personal loan is that the money be invested in an income-generating asset, or increasing the marketable skills of the person applying for the loan.
“The sum taken out for home renovations will largely depend on repayment affordability. The repayment amount is directly linked to the interest rate that will be paid on the loan which, in turn, is linked to the type of loan you take out,” says Mitchell.
Making use of home loans for renovations
Mitchell says that adjusting your home loan is a more cost-effective option by far than personal loans. Home loans are secured lending instruments because the bank can recover their asset if you don’t make repayments.
According to Colin Strumpher, Western Cape sales manager for BetterBond, you can register an additional bond over and above your original bond in order to have access to additional funds for the purposes of renovations.
“Originally, a bond for a specific amount was registered. As you repay the loan, the amount is much less than the original sum, and you can apply for the difference without having to register a further bond,” says Strumpher.
He recommends using an access bond, because no registration is needed. This is a facility that all banks offer, should you qualify, that makes any additional amount paid into the home loan accessible for any purpose you wish.
“You can also raise a new bond on a bond-free property. Perhaps you had a bond before and paid it off, cancelled it, or you bought a property for cash. You can now apply for a bond on this bond-free or unencumbered property,” says Strumpher.
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