January 13, 2022

Should You Use Your Savings For Your Home Renovation? Why & Why Not?

You want the best financing solutions for your home renovation. We get it; it’s not like someone wants to adopt the worst answers.

There’s a problem:

There’s no exact answer regarding this matter. Funding for your home renovation depends almost entirely on subjective factors (e.g., your current income level and budget) plus issues that are difficult to gauge (e.g., the world’s economy).

Read this article below for an on-point analysis of all these issues. We’ll turn the case on all sides to help you find the best-personalised solutions for your needs.

Home Renovation Purpose

The renovation is an essential factor that should influence how you’re paying for your home renovation. For example, you may want to remodel your home because you want to sell it.

In this case, taking a home renovation loan is an excellent idea if:

  • The interest is low
  • Home prices are high
  • You’re planning to sell the home shortly after renovating it

Pro tip: Be smart about what home renovation you’re undertaking.

You might think that specific improvements can significantly increase your home’s cost, in which case you tend to spend lavish amounts.

Sometimes, that’s a mistake.

According to the latest Cost Vs. Value Report by Remodelling Magazine, most home renovation in the US didn’t boost houses’ resale values at all.

There’s not a similar report for Singapore, but the current state of the market is that house values are on the rise. That means you could benefit from a home renovation loan if you plan to sell that property within the next five years.

Let’s consider the other possibility now: You don’t want to sell the property in the short term.

This situation is more delicate because the renovation money isn’t an investment, so you won’t get it back. If that’s your situation, you’ll have to consider the factors below:

Elective Home Renovation?

Let’s face it:

Many home renovations are elective, meaning you don’t have to do them. For example, you don’t need to make your bathroom look cosier or set up a gym in your basement.

In this case, ask yourself these questions:

  • Will I resell the property shortly after making these improvements?
  • Will these improvements bring me considerable ROI based on my very accurate research, KPIs etc.?

If the answer is yes, then getting a home renovation loan is an excellent idea because you’ll use this loan as an investment.

If the answer is no, assess:

  • Your budget
  • How much you can realistically wait before making these improvements

For example, let’s say you want to add a dry sauna to your house because you’ve read all about its magical-like health benefits.

Let’s also say you can comfortably save $1,000/ month. At this rate, you’ll need about five years to gather enough money to build that sauna. If you can wait this long, you maybe should.

What if your home renovation isn’t elective?

For example, you might need new power points for an air-con. You might have termites. Your baby is on the way, and you have to prepare a room for them.

This list is virtually endless.

So, if you know you need that home renovation fast because it will improve your quality of life and save you a lot of troubles in the future, ask yourself this:

Do you have enough money for the job in your savings account?

  • No: The matter is solved for you by the Gods of Wealth. You’ll have to consider a renovation loan.
  • Yes: Keep reading below.

How Much Money Do You Need?

Obviously, the cheapest way to pay for your home renovation is using your savings. That’s money you already have, and that’s not producing you a lot of interest.

However, you have to figure out how much money you need in the first place.

And that’s not easy.

Here’s an uncomfortable truth about home renovations that some people might not be willing to admit:

Every home renovation project you undertake will end up costing more than you think. It will also take you longer than you planned for initially.

Consequently, setting up a budget for your home renovation can be challenging. As a rule of thumb:

  • A kitchen renovation will cost 5-15% of your property’s value
  • A bathroom renovation will cost 3-7% of your property’s value

That said, let’s look at the alternatives:

Small Project

Let’s say you’re undertaking a small project, such as installing a few fixtures. In this case, the costs will be pretty low, and you can use your savings account.

Besides, small projects are usually pretty easy to do, too. So:

  • If you have moderate DIY skills, you can start the task yourself.
  • You can enlist the help of a few friends who have the skills you lack, and:
  • You can reuse certain materials in your home.

Here’s the thing:

You can take a loan for your home renovation even if the amount’s small. In this case:

  • You get to keep your savings if something else happens – like a new worldwide financial crisis.
  • The small amount you borrow is easy to repay in a few months, so you’ll be debt-free and hold on to your savings.

However, most people in this situation will choose to use their savings. Now let’s analyse the other possibility:

Large Project

Large projects require more cash, and there are fewer chances you can DIY your way out of them. That situation brings us to the following question:

How Much Savings Do You Have?

If you have lots of savings, that’s cheaper money. Your savings account brings you around – but mainly less than – 1%/year in returns.

By comparison, a bank’s renovation loan will have a 3% annual interest rate, which translates into a 4% effective interest rate.

What if you don’t qualify for a bank loan?

If your credit score or income level is low, banks might reject your loan request. In this situation, you can always reach out to a licensed moneylender in Singapore. These financial institutions are more interested in your current ability to repay the loan than other issues.

However, a licensed moneylender in Singapore can ask for a maximum interest rate of 4%/ month.

Yikes.

Let’s consider two more scenarios to deal with this problem:

You Have a Lot of Savings

If you’re swimming in money and the home renovation you’re planning is barely going to make a dent in those savings, go ahead and use your cash.

Like we said before, it’s cheap money.

Or:

You Don’t Have Many Savings

In this case, it’s probably not the best time to start slimming down that cash cushion. After the COVID-19 crisis and the new climate-change threats, the world’s economy is looking shabbier by the minute.

Inflation; inflation everywhere.

Consequently, you need that cash cushion to, well, cushion you during the next few years.

The job outlook can be on your side in Singapore for the next year, at least. However, even if most industries hire more people, that growth is unequal across sectors.

That means you might be the unlucky one.

Unfortunately, that possible scenario implies negative consequences for a potential layoff. In this case, you need some financial security to continue paying:

  • Your utility bills
  • Essential expenses (e.g., food, water, phone, medicine, transportation, etc.)

These savings are also essential if you have to retrain for another job or finally want to open up a new business.

So why not use your savings for that home renovation now, and get a personal loan if disaster hits later?

That’s an excellent question but look at it from a financial institution’s perspective.

Now, there’s an employed Singaporean looking to make home improvements. Later, there will be an unemployed, desperate Singaporean facing a medical emergency.

Who is the riskier customer of the two?

That’s who you’re less likely to lend your money to. And, if you do find a way to lend money to that person, you’ll likely give them less and with higher interest.

Pro tip: You need at least 6-months of savings in your account to get by in case of an emergency.

How Much Other Debt You Have?

This analysis isn’t finished yet; you still have one more matter to consider: your preexisting debt.

If you have a lot of debt, you may not get another loan approved. Thus, you’ll have to:

  • Assess your project’s requirements to gauge a minimum budget for the job.
  • Check if that sum fits the current TDSR rules in Singapore, 55%.
    • A renovation loan gets you a maximum of $30,000 over maximum 5-year tenure.
    • Calculate the monthly instalment rate for this loan and add all the other instalments you’re paying.
    • The total sum can’t be over 55% of your gross monthly income.

So, if you’re very close to that TDSR limit or over it, your options are:

  • Using your savings
  • Taking a smaller loan and using part of your savings
  • Taking a smaller renovation loan now to tackle urgent changes and a smaller loan later to tackle the remaining issues

In Conclusion

Using your savings for your home renovation loan can sometimes be an excellent idea. For example, if you have a lot of cash savings, you’re dealing with a small renovation project and have a secure job.

Otherwise, you should consider a loan for your home renovation.

That alternative can be problematic too.

For instance, you might have a low credit rating and income or be too close to reaching your TDSR limit. At this point, you have to do your research carefully and choose the best loan provider.

The alternative is struggling to pay excessive interest and drowning in debt.

RenoLoan can save you from that.

Fill in your data, and we’ll send you the best offers on the market in just 15 minutes. Get your quote here.

 

 

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