Financing Your Renovation: What are the Options Available?

Included: the various types of loans to consider.

Renovating your dream home may easily be one of the most expensive things you ever spend on. And unlike a house purchase, you can’t use your CPF to finance it. As such, it’s important to do your research and have a plan in place to finance your renovation (and avoid the heartache of seeing your bank account balance drop significantly).

Some of the things involved in the prep work includes deciding on a budget, finding out your renovation must-haves, and exploring suitable financing options. Here, we’ll explore the various renovation financing options available, and important questions to ask yourself before signing any papers.

Why should I consider taking a loan for my renovation?

There are numerous reasons why you may need to take a loan for your renovation. For the newlyweds, your wedding and house downpayment may have affected your finances, while the singles among you may need help financing a house purchase and renovation on a single income.

Ultimately, taking a loan for your renovation can help to ease your financial burden, making it easier to manage your cash flow.

What are the types of loans I can take up?

Renovation loan

As its name suggests, a renovation loan – which is offered by various banks and financial institutions like DBS and CIMB – is solely meant for your renovation (unlike a home loan, which is used to finance your mortgage).

Typically, a renovation loan has a lower interest rate than other types of personal loans – as of writing, it currently hovers at an average of at least 4%, and is usually quoted at monthly rest rate. What that means is that the interest amount is calculated every month as you pay off your loan, and reduces over time.

Also, the repayment period can be anywhere between one to five years, and can be used to pay for renovation works such as flooring, carpentry, electrical rewiring and more. However, the type of work covered may vary across banks, so it’s best to do some research before making a decision.

To start, you’ll need to provide detailed information about your renovation plans, including the interior designer you plan to use as well as the overall cost of your renovation.

Also, note that the maximum amount you can take a loan for is $30,000 or 6 times your monthly income, whichever is lower. That means if your renovation comes up to a total of $65,000, you’ll still need to personally fork out $35,000 to finance the remainder.

Personal Loan

Other than a renovation loan, another option is a personal loan. They’re typically much easier to obtain than a renovation loan as minimal documentation is required, but the biggest upside is the fact that you’re able to take up a much higher loan amount, too.

However, a personal loan comes with its fair share of downsides. For one, the processing rates are much higher than other types of loans (an estimated 1.5-4.5% fee). For another, the interest rates are also much, much higher – as of writing, the interest rates for personal loans average at a staggering 8%, which definitely makes this a less favorable financing option.

To make things clearer, the main differences between a renovation and personal loan are:

Store Loans

A home renovation involves getting furniture and appliances as well, which is a whole other expense in itself.

Fortunately, many furniture and home decor stores also offer financing options for their products. They typically offer interest-free store loan plans with repayment periods from 6 to 24 months. Just be sure to pay within this interest-free period, as you'll be facing high interest rates afterwards!

Financing your renovation with a mixture of loans: an example

To better understand how much you may need to repay each month, let’s look at an example.

Homeowner Profile:

• A young couple earning a combined total of $10,099 a month (the median pay in Singapore)
• House type: Living in a 4-room BTO flat
• Renovation cost: $62,800 (the expected renovation cost for a 4-room BTO flat in 2023)

Loans taken:

• Store loan: $10,000, with a 1-year repayment period and 0% interest rate
• Renovation loan: $30,000, with a 5-year repayment period and 4% interest rate

Monthly payments required:

• Store loan: $833 a month
• Renovation loan: around $553 a month
• Total monthly payments for both loans: $1,386

Should I still go for a loan if I can afford the payments?

As much as it may sound like a non-answer, it ultimately depends on your financial situation. Taking a loan may seem like a convenient financing option, but it’s also important to note that doing so may mean accumulating more debt and paying higher interest rates in the long run.

As such, it’s advisable to pay for it out of pocket where possible. However, if you don’t have enough saved up, or are tight on cash, avoid overspending on your renovation and take up a loan that is financially comfortable.

Final thoughts on taking a loan for your renovation

While it’s always recommended to plan for your financial goals ahead of time, unexpected situations may arise where an urgent renovation is required. In such cases, we suggest opting for a renovation loan with a short tenure to minimise the interest payments.

Additionally, it's crucial to set a realistic budget for your renovation and work with a reputable interior designer who can guide you through the process. Be sure to do your research and compare interest rates, repayment terms, and other factors among different lenders.

In the end, proper planning and financial management can help you turn your dream home renovation into a reality while staying within your means.

This article was written in collaboration with Dare to Finance, a finance platform that aims to empower Singaporeans to lead a successful life.

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