Advice matters
Pay down the mortgage or renovate the house?

Have some extra money available? Then you may be pondering the question: “Pay down the mortgage or make some home improvements?”

It’s a great question – but one that doesn’t have a direct, simple answer to it.

A lot depends on your circumstances and goals – here are some key things to think about, according to our SHARE advisers. Please don’t hesitate to contact us if you’d like to talk about your situation in detail.

Think about the ‘Big Picture’

Before you commit to increasing your mortgage repayments or divert your money into a home renovation, make sure there aren’t any other priorities you’d like to tick off your list.

Investing more, boosting your insurance cover, building a bigger emergency fund – these are just some examples of financial goals that may be worth considering. Not sure what to prioritise? Get in touch; our SHARE advisers can help you look at your ‘Big (financial) Picture’ and plan ahead.

‘Return on investment’ vs interest savings

Provided you’re not planning to sell your house anytime soon, the choice between paying down the mortgage and renovating comes down to your ‘return on investment’.

Let’s say you have some home improvements in mind, like redoing the kitchen or converting the garage into a rumpus.

First of all, you need to determine how much these renovations will cost you. Then, get a property appraisal to find out the potential increase in your home’s value. Your potential return on investment is determined by the updated (potential) value, minus the cost of renovations.

Now, let’s focus on the mortgage. As you know, the faster you pay off the mortgage, the lower the overall interest will be – and the faster your equity is likely to grow. If you can afford to increase your mortgage repayments or make some one-off repayments, you may be able to shorten the life of your home loan and reduce the total interest paid over the term of the mortgage.

At this point, you’ll have two figures to work with: Your renovation’s potential return on investment, and the interest amount you can potentially save over time, by paying down your mortgage faster. This is where things can get a tad tricky, because weighing these two options is a bit like comparing apples and oranges.

The potential return on investment from your renovation is based on assumptions: The ‘actual’ ROI will depend on the property market when you decide to sell. Paying down the mortgage is often considered a more secure option, but again, how much money you’ll save on interest will depend on a number of factors – including interest rate trends over time.

So, what else is there to consider?

How long will you live in the house?

Planning to live in the house for the foreseeable future? Then the potential increase in value isn’t the only factor to consider; the potential emotional return is also key. Until you decide to sell, you’ll be the one enjoying your updated kitchen, your new bathroom, or that shiny hardwood flooring.

How does the value of your home compare to other properties in the area?

Generally speaking, if your home is the ‘worst house in the best street’, a renovation may unlock its potential and increase the value significantly.

The potential return may not be as significant if your home is already one of the most expensive properties in the neighbourhood – but again, we recommend arranging a property appraisal for a more specific price guide.

How can you get the most bang for your buck?

Not all renovations have the same impact on value. Generally, some improvements are more likely to have a better return on investment than others, including roof insulation, bathroom or kitchen remodels, deck extensions and entry door replacements (just to name a few).

Extensive landscaping, stylish decors and premium kitchen appliances may not boost the property value as much as you’d expect – but if you like them, and you’re planning to live in the property for the time being, return on investment can take second place.

Cosmetic changes vs energy efficiency

Another key thing to think about is the purpose of your renovations. Some renovations are about cosmetic changes (like a new kitchen countertop), while others are about energy-efficiency (like floor insulation). In certain cases – like modern double-glazed windows – the benefit can be twofold.

When running your cost-benefit analysis, keep in mind the savings you can make over time by investing in energy efficiency, as well as buyer’s appeal.

Have you borrowed more than 80 per cent of the value?

Most banks charge higher interest rates (a low equity margin) on mortgages over 80 per cent of the property’s value. So if you can use a renovation to increase the valuation, this would get you below that 80 per cent threshold.

You can then ask your bank to review your interest rate, and remove the additional interest margin. Not only would you save money in interest costs, and reduce your repayment amount, but the renovation will (hopefully) increase the value of your home.

A matter of ‘timing’

If you’re not looking at putting your home up for sale anytime soon, paying down the mortgage as fast as possible before renovating is often the sensible thing to do. By making additional repayments on top of your minimum repayment amount, you can reduce your debt and overall interest faster, freeing up some equity to re-invest in a renovation.

Also, if you renovate now, your new home features may not be as ‘new’ and appealing years down the track. That’s not a big problem if you’d like to enjoy the fruits of your renovation while you live there. But for the highest returns on investment, renovating at the time of sale may be the way to go.

Need help weighing pros and cons?

Ultimately, the decision between renovating and paying down the mortgage depends on a number of factors, assumptions and conflicting emotions. Whatever your move will be, please don’t hesitate to contact us: we can work with you to help you implement your decision.

Like to discuss your needs and goals? Get in touch with a SHARE adviser. We’re here to help. Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current development or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.