Australians love to renovate property but if the latest housing finance figures are anything to go by, we’re not dipping into our existing debt to get work done despite record low interest rates.
The number of refinancing commitments for owner occupied housing fell 0.8 per cent in November 2016, following a fall of 1.1 per cent in October 2016, according to the Australian Bureau of Statistics.
Omniwealth senior financial planning Andrew Zbik reckons that making use of a home loan offset account and interest free loans offered by kitchen manufacturers is the best way to go.
He says this is a better option than saving to renovate, which restricts cashflow or taking out another loan and borrowing to build.
Doing the latter may will only increase non-deductible debt and once interest is taken it into account, it can actually blow out the true cost of any renovation compared to the actual purchase price.
So how does this work?
For example, a kitchen manufacturer may provide a $30,000 interest free loan with monthly repayments of say $833 over 36 months.
This can cost $540 more per month than borrowing money from a bank but it does result in an additional $30,000 sitting in the offset account.
If you find an appliance retailer that provides 50 months interest free with nothing payable until the end of the 50 months, this also helps.
“Knowing that the monthly repayments can comfortably be paid to the kitchen manufacturer, having the $40,000 sitting in your offset account will save $6,300 in interest over the next five years assuming a constant interest rate of 4.50 per cent per annum on an interest only home loan,” says Mr Zbik.
“At the end of the three years all of the payments to the kitchen manufacturer are finished and after five years there is cash sitting there ready to payout the appliance retailer. There is still $30,000 cash available then for something else.
“To make this work you need the discipline not to spend the $40,000 for something else, but it does now mean that a $40,000 kitchen renovation is now costing $33,300 by smartly managing cash flow.”
What are the risks?
Mr Zbik says that the things you need to be aware of include missing a monthly payment or not paying out the amount in full at the end of the interest free period, this will often result in high interest rates being applied to the balance due, often up to 20 per cent interest rates – ouch!
There may also be penalties for early repayment and obtaining interest free finance may restrict your capacity for other loan applications.
You need to make sure you read the terms and conditions of the interest free finance agreement.
Also, some suppliers do provide a discount if you do pay upfront in cash. So keep that in mind too.