Getting the interiors of your house redone has become common. And may even hold an important place in your to-do list. Sometimes you plan to renovate the house as it’s been a long time you did it or just to give it a facelift with small changes. Most of clients or their family members, I speak to, consciously consider ways to improve the look of their house. Research organisations tracking the home improvement market have observed that the sale of product meant for home improvement has seen an increase over the past six months globally. With employment growth and housing markets expected to improve in the next one year, a stronger growth in this segment is expected.
India is no exception. With the average size of homes increasing, the money being spent on refurbishing houses are on an upswing and is only likely to increase further. Then, the growth in average salaries will also lead to more homes undergoing a change in their looks. Financing home improvements is quite a challenge for more than one reason. First, individuals, generally, never provide for home improvements in their financial plans, thereby making availability of funds for the same a tad difficult. Second, in almost every case, costs for improvement projects tend to always be more than budgeted for. And unfortunately it is extremely easy to give in to the temptations and spend more than the pocket holds.
If you are looking forward to improving your house, start like this
What do you need to change?
It is important to finalise the aspects you are going to work on. And it requires to be well reasoned. If you are looking to sell your house in the short term, then it logical to avoid renovation or at least an expensive one. This is so because buyers may not want to pay for it. They may rather want to spend on renovating the house their way.
However, it is also often argued that improvements help in increasing the value of the property, which would help in realising better valuations at the time of sale.
How much can you spend?
Once you know what all needs to be redone, make a budget accordingly. Write down every detail and the cost involved. You could seek help from friends / relatives who might have done up their houses recently or check with furnishing shops to ascertain costs. Remember it won’t be an easy task. Although budget for renovating your house could vary from what this homework depicts (depending upon different estimates provide by different sources of information), but a written budget prepared beforehand will help in securing a general understanding of the entire process. And keep some basic costs in check.
Adequate attention has to be paid to the cost of finished products, cost of labour and contractor expenses. Decent buffer (approximately 10 to 15 per cent) should be provided for any escalations in costs or new developments that may unfold during the actual process.
More importantly, decide on how much of the cost prepared are you willing to spend and try to stick to it.
How will I accumulate the funds?
Depending on the budget, you may consider the funding options. Two basic ones would be borrowing or utilising savings. There are plenty of other financing options also available, but the optimum choice depends on your financial situation.
Loans: Most banks and financial institutions offer home improvement loans. These loans facilitate internal and external repairs and other structural improvements like painting, waterproofing, plumbing and electrical works and much more. Some banks extend these loans for purchase of furniture / furnishings and electronic items like fans and air conditioners.
Typically, banks and institutions fund up to 80 per cent of the cost of renovation, depending upon the value of the property. The interest rate ranges between 10.50 to 14 per cent. These loans are given for up to 15 years depending on your age. Some can extend it to 20 years if you are young also taking into consideration your qualification and hence profession, repayment capacity, savings habits, and so on.
This scores over personal loans as they are secured and, hence priced 3-4 per cent lower than personal loans. A loan is also ideal as your savings can continue earning returns. Another advantage is that the interest paid is deductible from your taxable income up to Rs 30,000 for self-occupied properties and any amount in case of a let-out property under Section 24 of the Income Tax Act.
Credit card(s)/personal loan: These are some alternative source of raising funds. However, these loans would be quite expensive in terms of the interest rates charged, unless the borrower is prepared to repay the loans using an accelerated repayment strategy.
Cash: Inspite of the tax benefits on home improvement loans, it would be a prudent option to fund the project using ideal cash. Additional debt for this purpose will not only lower your networth but will also have an impact on the domestic budget. If funds for this purpose are not available immediately, you may defer the expenditure for some time. But this period should provide the much needed time to plan the improvement, line up the contractors and look at some cost cutting measures.
The biggest financial challenge during the execution of a home improvement project is sticking to the budget decided upon.
The writer is a certified financial planner