I want to renovate my house which I have been living in since November 2016. I am considering taking either a home equity loan or a home equity line of credit. Which is the best option? Is this the right time to be creating such a debt considering that we are in a recession?
I think it would be appropriate to answer your last question first. In short, now is not the time to be considering new debt as we are faced with many uncertainties. These uncertainties include your future cash flows which, in turn, will be determined largely by the industry you operate in, and how your future income is likely to be affected by the coronavirus and the lockdown. It is reasonable to assume that we will feel the effects of the national lockdown for many months or even years to come, so right now one should rather be looking at reducing costs to help weather the difficult economic conditions that undoubtedly lie ahead.
Assuming that your industry and source of income is not adversely affected by the lockdown, borrowing costs are particularly low at the moment which is an advantage – although there is no guarantee that it will remain this way. You should, therefore, be confident that you can meet your monthly repayments should interest rates begin to rise.
Having pointed out the fairly obvious issues above, your question centres around the choice between a second bond and a re-advance on your current bond. This choice will be driven by several factors which include:
- The first consideration is the amount of equity built up in your current property. As you purchased your home in 2016, you will have been paying a bond for approximately four years. This means that, unless you have been making additional contributions towards your home loan, it is unlikely that you will have built up much equity at this stage. Having said that, a re-advancement on your existing home loan would be the most cost-effective financing solution. You would however only be ‘freeing up’ or accessing the capital that you have already paid off. Should this capital be sufficient to fund your renovations, this would be the most obvious and cost-effective solution.
- Applying for a second bond would be a more costly exercise as it would involve bond registration costs. This can only be done if the additional amount you require exceeds your existing registered loan amount and the value of your existing property has increased since purchase. Your bank will need to complete a new home valuation to establish your home’s present value, which could be tricky under the current circumstances. Assuming that you do not already have an access bond, our advice is to consider applying for a re-advance on your current loan.
Over the next few months of uncertainty, I suggest you take maximum advantage of the lower interest rates, and hopefully, lower expenditure and retain your bond repayments at the levels they were at pre-interest rate cut. If you have any wiggle room in your budget, we recommend using any spare cash to add to your current bond repayments. In other words, use all available surpluses to boost the equity in your home loan. Once there is more economic clarity, which could be between six and 12 months, you will then have access to a reasonable level of equity and can reassess your position at that stage.