While the nation's largest bank, SBI, has reduced its MCLR (marginal cost of lending rate) by 90 basis points across all loan tenures, bringing the effective home loan rate down to 8.60% per annum from 9.10% per annum, PNB has reduced its MCLR by 70 basis points.

People frequently believe that purchasing a home is easier than renovating one. When purchasing a home, you are already aware of the associated costs. However, it can be difficult to estimate the cost of a renovation. As soon as you begin renovations, you will discover all the new things that require repair that you were unaware of, resulting in a higher renovation cost.

How to Plan for Home Renovation Finances

Renovation necessitates a great deal of forethought and patience in order to reduce expenses and meet your desired deadlines and standards. There are a number of considerations to keep in mind when it comes to budgeting and planning for your renovation. Explore them in the following article.

What do you want to accomplish with the renovation?

You must determine exactly what you intend to accomplish during a home remodel. The process may involve altering the floor surface, repainting the walls, adding a room to the floor plan, reorganizing the bathrooms, removing or constructing a wall, overhauling the electrical system, installing a false ceiling, etc. The list could be endless. But it is essential that you focus on what is truly essential and avoid the trivial. This would prevent you from spending excessively.

Plan each renovation phase and its expenses

After finalizing a list of renovation tasks, you can divide them according to their nature. For instance, all construction work can be completed in one phase, plastering and painting in another, and electrical fixtures installation in a third. You can estimate the duration and cost of each task. It is prudent to budget in excess of the anticipated expenses. You may discover that actual expenses are 5 to 10% higher than anticipated. You now have the option of assigning the entire renovation project to a contractor or performing it yourself by hiring specialists for each task. Both alternatives have advantages and disadvantages. You can compare the rates you calculated with the rates offered by the experts and choose an option based on your budget and level of comfort.

Prepare the finances

After planning the renovation and its costs, you must now determine how you will raise the necessary funds. If the funds are readily available, you can immediately execute your plan. But if you are cash-strapped, you may need to borrow. Banks offer a variety of loan options that could be used for home improvement. Let's examine each of these options in turn.

Home renovation/improvement loan

This is a straightforward loan option for homeowners looking to make home improvements. A renovation loan's advantages are its low interest rate, up to 15-year term, and eligibility for tax exemption under Section 24. (B).

Typically, a bank will lend 70 to 90 percent of the total amount required for renovations. Your property serves as the  security for loan. On this loan, the majority of banks have waived the prepayment penalty. If you need a large loan amount, you can choose this loan option.

Home loan top-up

If you are currently making payments on a mortgage, a top-up loan may be a good option for the renovation. The interest rate on loan top-ups is close to that of your home loan. The borrowing amount is determined by your home's equity. Typically, banks allow a top-up loan of up to 70% of the equity value. The top-up loan functions similarly to a personal loan, but it has a lower interest rate and is secured because the home is already held as collateral. This option is simple and quick, but only available to those servicing a mortgage.

Loan against property

When obtaining a loan secured by property, you are not restricted in your use of the funds. You may utilize it as you see fit. LAP could have a slightly higher interest rate than a renovation loan. As the term suggests, in order to obtain an LAP, you must place your property as collateral with the bank. You cannot obtain additional loans against the property until you have paid off your existing loan.

Therefore, you can consider an LAP if you need to raise a substantial amount of money. Suppose you need a loan of 10 lakh rupees, but your property is worth 1 crore rupees. It is not worthwhile to mortgage the entire property for a relatively small amount, as it will reduce the equity value of the property.

Other loan alternatives

You could also investigate personal loans, gold loans, and loans from family or friends. Personal loans have a high rate of interest, particularly if your CIBIL score is near the bottom of the eligibility range. Personal loans can be considered if your funding needs are modest and there are no other options available.

If you wish to unlock the value of your idle bullion holdings, a gold loan could be useful. The interest rate is greater than that of a top-up or LAP, but less than that of a personal loan.

If you can obtain a lower-interest loan or an interest-free loan from friends and family, you should consider it if you can repay it according to the terms you agree upon.

In conclusion, it is prudent to plan your home renovation and its costs. You can invest small monthly sums in a recurring deposit or liquid mutual funds and then use the funds for the renovation in a few months or years. If you have decided to obtain a loan, you should prioritize a home loan top-up or a home improvement loan.

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