Breaking walls (in your house) doesn't necessarily mean breaking the bank too.
Having a home to call your own means that you want to establish a sense of stability in your life. In this frame of mind, the thought of shouldering a $30,000 renovation loan — right after taking out a 25-year mortgage — will make your palms sweat. Well, don’t have a panic attack just yet. We spoke to some new homeowners and contractors on how to do up your first home without needing a massive loan. Let’s begin:
Renovation costs are getting crazy
In August 2017, the Consumers Association of Singapore (CASE) raised an alarm about the increasingly crazy cost of renovation packages. In the seven months from January to July that year, consumers collectively spent around $8.42 million on such packages. This figure translates to $11,711 per renovation package on average, when the figure in 2008 was only $5,742. With the COVID-19 outbreak, this figure has since increased even further, along with the number of complaints raised to the association.
Doing up a house from scratch, especially when you’ve just collected your keys from the developer or HDB, can cost much more. Fully renovating a 4-room BTO flat can cost upwards of $50,000, plus appliances. Not to mention the multiple unexpected and hidden costs that may arise during the renovation.
So how do most people finance these huge renovation packages? Usually, with a renovation loan.
What is a renovation loan?
A renovation loan differs from a personal loan; the interest rate is a tad lower — somewhere in the range of 4% to 6% per annum. However, renovation loans are capped at $30,000, or six months of your income (whichever is lower). Your contractor might even bust this budget. If this happens and you have no cash to pay, you’ll need to get a high-interest personal loan to cover the excess.
The point is: taking a renovation loan is a lot of money, and the interest rate isn’t exactly low. So how do you avoid using more credit (on top of your home loan) and still have a homely apartment that is cosy and reflects your style?
How to avoid needing a renovation loan
Let’s get the obvious out of the way: if you save up enough money, you don’t need to use a renovation loan. But that’s as useful as saying you can eat less to lose weight, or practise more to join the Olympics.
Putting aside the obvious, here are practical steps to make your renovation affordable without loans:
- Budget to pay over 6 months, then apply for an interest-free loan
- Hire an accredited contractor/interior designer
- Renovate in phases
- Minimise customisation
Step 1: Budget to pay over 6 months, then apply for an interest-free loan
Many banks offer interest-free balance transfer loans (i.e. there is no interest charged during a certain tenure, after which the loan defaults to its usual rate). Balance transfers allow you to pay off your debt without accruing interest over a short period, usually 6 or 12 months.
For example, if your total renovation cost is $30,000, you can charge it to your credit card and apply for a balance transfer loan. You then have to budget to pay off $5,000 a month for six months or $2,500 a month for 12 months at 0% additional interest (although, do take note that you have to pay an administrative fee for the loan – the longer the tenure, the higher the fee).
However, the danger with balance transfers is that the interest rate at the end of the six- or 12-months grace period may be higher than the maximum renovation loan interest rate of around 6% per annum. To avoid this, you have to be 100% sure you can make all the payments within that grace period.
Step 2: Hire an Accredited Contractor/Interior Designer
One common reason people need a renovation loan is because they were ripped off by the previous contractor or interior designer.
Lured by deep discounts and freebies, some people engage these so-called professionals. Then, their contractor disappears with their money halfway through, or the designer tacks on a list “unexpected” costs they never saw coming. Either way, the budget is bust. In order to undo the mess and/or get a half-finished house fit for human habitation, their only option is to take up a renovation loan.
The lesson here: stick to accredited contractors or designers — look for CASETRUST-RCMA Joint Accreditation. Companies with this accreditation must secure your deposit through a special performance bond. In other words, you’ll be able to get your money back if the contractor vanishes. Accredited companies are also vetted, so you won’t end up dealing with shady characters who turn your under-renovation house into a gambling den.
Step 3: Renovate in phases
An interior designer we spoke to suggested that:
“You don’t always have to renovate the whole house at once. You can just renovate essential areas first, like the bedrooms, kitchen, and toilet. Then, you can move on to making a nice living room, study, junior suite and so forth later.
We have customers who renovate the essential areas first and then only approach us to renovate the other parts of the house two or even three years later. They save up the money in the meantime and they don’t have to use loans at all.”
As a customer, all you have to do is to resist the temptation of instant gratification.
Step 4: Minimise customisation
The bulk of renovation costs come from two things, and it’s not materials and labour. More precisely, it’s materials and customisation.
Our interior designer explains that labour costs can be quite low. It only gets expensive when you need a contractor with specialised skills, such as a skilled carpenter to craft a special rotating bookcase. The more customised and unique the features you request, the higher the cost (and the more likely you are to need a renovation loan).
As far as possible, have your contractor use pre-built items that don’t have to be designed and constructed from scratch. Avoid design elements like custom-built feature walls (e.g. a faux brick surface in the living room), kitchen islands, and walk-in wardrobes.
Again, the more things your contractor can buy off a shelf, the more likely you are to not need a loan.
The more patient you are, the less reliant you’ll be on renovation loans.
Ultimately, the best way to avoid renovation loans is to be a patient homeowner. Remember, you don’t have to sacrifice the upgrades you want to your home – you just don’t have to buy them all at once.
Do consider renovating a small part of your house first, such as one room, or just the flooring. Then, save up your money and pay for the next upgrade in cash when you can afford it. If you do this every six months to a year, you could have your dream home in about three years, without having taken a single loan to renovate.
(Besides, it gives you something to always look forward to at home).
Read these next:
How Much Should You Pay For A Home Renovation In Singapore?
When to Use a Personal Loan for Home Renovations
How to Save Money for a Flat Before Your 35th Birthday
Singapore Home Loans: What does the Bank Jargon Mean?
What Type of HDB Flats Can Single Singaporeans Buy?
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