Ravi Chandran
Renovation loan financing requires you to know what works best for you
Several renovation loan financing options are available out there and you should try and understand every one of them and decide what is best for you.
Homeowners planning a renovation or remodeling project should carefully consider how they will finance the job. Many payment and financing options exist for homeowners needing a renovation. The one that suits you best will depend on many factors, including:
- how much your project will cost,
- how much money you have on hand,
- how long the project will last,
- whether you will be doing other home improvement projects in the future, and
- how much equity you have in your home.
Once you are more or less settled on that, you should think about the most common renovation loan financing options, including which options work best for you.
Paying Cash
Some homeowners have saved up enough cash pay for the home improvement project outright. By avoiding financing altogether, you don’t pay finance charges or interest, which can save a bundle of money. In addition, since you don’t use your home as collateral for paying back a loan, there is no risk of losing your home to foreclosure.
Using a Credit Card
If your project will cost anywhere from a few hundred to a few thousand dollars, you might consider paying with a credit card. Credit card interest rates are often quite high, but you won’t pay any loan fees or closing costs. But you should use this option only if you can pay off the entire balance in several months.
Unsecured Personal Loan
With an unsecured personal loan, you borrow money without using your home as collateral. That means that if you fail to pay, your home is not at risk for foreclosure. Some lucky homeowners can get personal loans from family members. Banks offer unsecured personal loans as well, but usually for small sums of money (for example, under $30,000). Beware of moneylenders, regardless if they are licensed or not, for many have exorbitant interest rates.
Home Equity Loan
A home equity loan is a loan that uses your house as collateral, just like your primary mortgage. With a home equity loan, you borrow against the value of your home less the amount of the existing mortgage (in other words, the equity). The borrowed amount is fixed, which makes it a good option if you are financing a one-time project. The interest rate is also fixed, which can be advantageous if you think interest rates will rise over the life of the loan.
However with many home equity loans, you will have to pay closing costs. So when choosing home equity loans and your renovation loan financing option, be mindful that as with any loan secured by your home, you risk foreclosure if you cannot make the payments.
Don’t Get Renovation Loan Financing From Your Contractor
Most experts warn against getting financing from your contractor or using a lender recommended by your contractor. Some shady contractors get deals from moneylenders that are loaded with hidden costs and fees. It’s best to negotiate the project’s price with your contractor and then get financing on your own.
The many stories of scams we hear, both in the news and from our friends, about renovation scams and less than unscrupulous renovation contractors makes us wary of even those who do an honest business. Home renovation is one of the larger expense items incurred by consumers with the payment of large deposits required even before a project is completed. Yet, unscrupulous contractors who hatch renovation scams often get away in Singapore because there is no official regulation for renovation contractors or interior designers here.
What we have in place of proper safeguards from renovation scams for home owners is a joint-accreditation scheme for renovation contractors by Consumers Association of Singapore (CASE) and Singapore Renovation Contractors and Material Suppliers Association (RCMA). The joint scheme tries to ensure that consumers are protected against the closure, winding up and/or liquidation of the renovation business through a deposit performance bond that safeguards their deposit payments”.
The threshold to entry to become a renovation contractor is also very low. This means that anyone can register a company (or business), claim to be an interior designer, take up renovation projects, all with the only aim of perpetuating renovation scams.
Against this backdrop, home owners are spending more and more on renovating their homes in recent years. Statistics show that over a 10-year period, the total renovation contract value has doubled – from $7,200 in 2008 to over $14,000 in 2017. Many are also paying a larger deposit or full upfront payment, which leaves them vulnerable to renovation scams and disputes with contractors.
The best advise anyone can give you as you are thinking of renovation loan financing is to always negotiate for progressive payment as the work commences, instead of paying in full up front.
A reputable renovation contractor will always provide options for progressive payments for homeowners. If anyone asks you for upfront full payment, even before the commencement of any works and regardless of the size of the works, it should make you very suspicious. It is better that you err on the side of caution with such contractors, no matter how attractive their proposal looks to you.
The following is a good guide for progressive payment to your renovation contractor:
10% – Deposit on signing of renovation contract;
40% – 1st balance payment upon commencement of renovation works;
40% – 2nd balance payment upon completion of 70% of renovation works; and
10% – Last payment should be issued 2 weeks after satisfactory completion of ALL works.
Never ask your bank to cut just one cheque
Most banks and financial institutions in Singapore do offer renovation financing packages and almost all of them will make cheques payable to the renovation firm or contractors as this is a renovation loan.
But homeowners should note that terms of conditions differ from bank to bank. It may be time consuming and difficult to compare all the renovation financing packages which are out there. The worst mistake an uninformed homeowner could do is to go with the first loan that is offered.
The best advice for homeowners who need to take loans for their renovation works would be to engage a loans specialist. The loan specialist would be able to match the best renovation financing package that meets the homeowners’ unique financial situation.
Even after you have found a bank which satisfactorily meets your needs for renovation, you should never instruct your bank to cut just one cheque for the renovation works. You should ask them to issue several cheques for progressive disbursement, according to your renovation timetable.
