Should You Take Out A Loan To Fund House Renovation?

PropertyGuru Editorial Team
House renovation in Malaysia can stir some passionate responses. If you’ve ever renovated your home, you know the joy that a fresh look and reward of hard work can deliver.
But if you’re one of the victims of a renovation that stretched wayyy over your budget, or past its schedule, you can perhaps understand the opposing point of view.
Renovation can be a great way to reinvigorate your home. Some people even use renovation as a way to try and increase the value of their home. So, what’s the story on the ground?
Is renovation a good investment, and is it a good idea to get financing for it? It’s time to take a look at the question of home loans for the purposes of renovation.

Understanding the meaning of renovation

We’ve got on our old jeans, some scruffy boots, and a newly fitted mask for the dust. It’s time to get started! But wait a minute, what even is a renovation?
There are several common terms covering a property refresh, and home renovation is just one of them. Whether you’re looking to renovate, remodel, or restore your home is down to the aims and ambition of your project:
  • Restore – Restoring a home is about bringing back its glory days. It’s about fixing things that are broken, replacing tired fittings, and returning the vibrancy of a property at its best.
  • Remodel – Remodelling is where things get a little more structural. This can include moving or replacing walls, combining rooms, or even adding extensions to your property.
  • Renovation – Home renovation in Malaysia is probably the term we use most. This term covers a wide range of home refurbishment styles, from simply redecorating a room and adding some new lights, right through to changing the positions of all the doors and windows. It’s about increasing, and improving, your home’s value.
While we use the term renovation widely when it comes to loans for the purpose of a house refresh, a renovation loan can actually cover elements of all three of these terms.
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Balancing the costs and benefits of a renovation loan

There are many reasons that homeowners might want to take out a renovation loan. It could be you’ve lived in a house for years, and are tired of looking at that same stain on the wall.
Maybe you’re expecting a tiny little addition to the family, and you need to shift up your space to make it suitable. It might also be that you’ve seen some amazing new kitchen design ideas and are itchy to get involved!
The reasons outlined above represent ‘preferences’ that inspire renovation. These are house renovation ideas founded on your desires and needs.
Now, those are great reasons to refresh your home, and gives you the opportunity to breathe some new life into the property you love.
However, there’s another side of the renovation loan market that’s also worth talking about. Sometimes, people may think that renovation and refurbishment is an investment opportunity, with guaranteed returns in the future.
There’s perhaps an assumption that paying to upgrade your home will bring a multiplier effect to your eventual sale price. That’s not always the case, and you should be wary of assuming it is!
If you spend RM20,000 putting deluxe new light fixtures throughout your home, you have absolutely no assurance that it’ll increase the value of your home.
That means you might end up spending RM20,000 that actually drains out, instead of returning, your money overall.
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There are some common types of renovations that are more likely to increase the value — improving an old bathroom or expanding the overall living space — but even in those cases, nothing is guaranteed.
Properties are valued based on what the market considers to be a practical benefit. Chances are, the next homeowner might hate your RM20,000 light fittings because it’s no longer ‘in trend’, making it completely pointless for valuation.
They’re far more likely to recognise the benefit of an additional 100 sq ft from your living room extension. But that still raises questions of cost vs. reward.

Questions of cost for renovation loans

Renovation loans are a type of personal loan, that means unlike a home loan itself, renovation loans in Malaysia are almost exclusively offered on a fixed rate basis.
What that means is, the interest rate on the loan remains the same throughout the course of the agreed tenure.
Unlike a home loan, there’s no collateral required for a renovation loan, although you do have to provide documented proof of costs.
This is a relatively simple process, and just includes things like invoices or payment for contractors.
There are times when renovation loans come packaged with home loans, and you should explore this option with your bank or financial professional to see if this makes more financial sense, based on your budget.
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Let’s take a look at a quick example of a simple renovation loan. Suzy wants to borrow RM25,000 for home renovation. She’s always dreamed of a new bathroom, and now it’s time!
How much would it cost to repay over 5 or 10 years, given a few different factors such as tenure and interest rate?
25,000
5%
5
31,250
521
25,000
6%
5
32,500
541
25,000
5%
10
37,500
313
25,000
6%
10
40,000
333
Comparing the different costs above shows how difficult it can be to balance the financial benefit of a renovation.
If you’re paying at the higher interest rate, and over the longer 10-year period, then a RM25,000 loan for renovation costs could end up costing you RM40,000 in repayment! That makes a difficult equation for your grand renovation investment.
There’s a real risk of overlooking the full renovation cost in Malaysia. You need to factor in the total cost you will pay out, and not just the value of the loan you receive.
It’s smart to try and reduce costs by being hands-on yourself — directly hiring contractors to do specific elements of the work, and you take the time to tackle the more manageable aspects of the project yourself.
If you want a cautionary tale as to why it’s not such a good idea, personal loans have been mentioned as one of the major reasons for bankruptcy over recent years, as seen below:

Year

Number of Bankruptcy Cases Citing Personal Loans

2015
5,228
2016
6,133
2017
5,496
2018
4,636
2019
5,706
Total number of cases over the years: 27,199
Source: Malaysia Department of Insolvency
Out of all the reasons for Malaysians filing for bankruptcy, personal loans was at the top of the list with 32%, with vehicle hire purchase and home loan rounding out the list with 22% and 13%, respectively.
As the worrying figures above show, many people borrow more than their salary can afford to pay back, and realise too late that they may have forgotten to take other important expenses into account, such as food, transport costs, and utility bills.
However, one positive point for people considering loans currently is the benefit of lower interest rates. A reduction in the Overnight Policy Rate (OPR), which is a lending rate between banks, alongside slow economic conditions, have seen a fail in interest rates recently.
As of 7th July 2020, the OPR rate was cut by 25bps to 1.75%, the lowest level on record. The lower this is, the cheaper it’ll be to borrow money!
With the impact of COVID-19 likely to continue to see challenging conditions for some time, the chances are that interest rates will remain low over the coming year.
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Pros and cons of a house renovation loan

There’s no definitive answer on whether it’s a good idea or not to take out a house renovation loan in Malaysia. It all comes down to purpose and planning.

1) Your purpose

If you’re looking to refresh your house and need to borrow funds, this can be a great way to breathe some new life into a tired space.
If you’re thinking of renovation to increase the value of your home, you want to be very careful to understand what you’re doing. There is no guarantee that renovation will add value to your home.

2) Your planning

It doesn’t matter if this is a house refresh or a value-driven investment, you need to plan in detail to understand your schedule and finances.
That not only includes the cost of the renovation itself, but the true lifetime cost of the loan you take out to finance it. This is particularly important if you’re undertaking renovation with the aim of increasing the property value.
Renovation is an exciting opportunity for homeowners. It’s not one you should assume will automatically return value.
You need to weigh up carefully the cost and benefits given your own property and circumstances, and decide if renovation is the right path for you.

Looking to discover more about how home financing works? Here’s Everything You Need To Know About Home Loans In Malaysia.