How Recent Interest Rate Changes Can Influence Your Home Renovation Budget

As we move onwards into the third quarter of 2023, inflation and high-interest rates continue to plague the everyday Australian consumer.

Since May 2022, interest rates in Australia have risen by 4.2%.

While there have been attempts by government officials to keep the financial problem at bay—particularly with the Reserve Bank of Australia keeping the cash rate at 4.10% for two months in a row—Australians are, for the most part, tightly gripping their wallets.

For people looking to purchase new materials to renovate their homes, this presents an intricate challenge.

Not only will they have to navigate the uncertain financial implication of this project that’s impacted by rising interest rates, but financial projections won’t be as stable during these trying times.

Regardless, the economics of the outside world is only a single piece of the puzzle. If you already have adequate savings or have secured good deals in some aspects of your renovation project, then it’s more than possible to see the project to its full completion.

That said, it still pays to be informed. Let’s look into ways these rising interest rates can change your home renovation budget—and what you can do to combat it.

1. Increased Borrowing Cost
2. If you’re undertaking a large project and are planning to borrow money through a loan, prepare to stomach a higher total cost than what you’ve dealt with in previous years.
3. The increasing annual interest rate naturally entails a higher repayment figure every period you’re set to pay.
4. Couple that with across-the-board inflation felt in Australia, and you’re looking at a pretty big final cost in both the mortgage plan and the downpayment.
5. For people who plan to borrow a sum of money to pay for their home renovation, this increased interest rate can be detrimental to preserving one’s cash flow. Consequently, this can spill over and disrupt a person’s financial stability.
6. If you want to keep track of your spending and loan terms, use a variable home loan calculator like Westpac's calculator to determine the exact figures you’re working with and your bills for the month.

2. Increasing Material Costs
3. Soaring interest rates create a ripple effect across all business sectors. This includes the manufacturing and construction industries.
4. If it gets harder for businesses to apply for business loans to run their operations, they may have to find ways to secure equity and remain afloat—namely, increasing the price of their goods.
5. This increased cost is to the detriment of the final consumer looking to buy these materials in bulk. When this happens, prices of essential materials like lumber, tiles, and fixtures can cost significantly more than you’re able to stomach.
6. In the most unfortunate of cases, homeowners may have to compromise on the quality or quantity of materials or delay a fragment or the entirety of their project.
7. Such a situation is a tough pill to swallow, but it’s something you have no choice but to accept and adapt to, especially if you've been meticulously planning your renovation based on previous market prices.

3. Impact on Labour Costs
4. Similar to material costs, labor costs are also expected to be relatively high with how the current interest rates are at present.
5. This is especially felt by Australian residents, as the Property Council of Australia has revealed that Australia’s labor costs are the fourth highest in the entire world as of 2022.
6. The reason for this is multi-faceted, with the Property Council of Australia citing “inflation, economic stimulus, and supply chain challenges” as the key drivers of this dramatic growth.
7. What this means is that, for homeowners, hiring contractors to do something as simple as a paint job can cost upwards of tens of thousands of dollars, depending on the size of the property.
8. Besides interest rate spikes, the influx of people moving to Australia has increased demand for renovations and the construction of new homes, causing prices to naturally rise as supply remains steady.

4. Changes in Property Value
5. If you’re renovating a property to sell it at a higher price, you’ll need to make a more comprehensive cost-benefit analysis to determine the profitability of the undertaking.
6. The combination of high material and labor costs could offset or significantly decrease the profitability of the property that you’re planning to put out in the market.
7. Couple that with the falling household spending (-1.8%) of Australians in 2023, and you could be holding onto an asset that’s highly illiquid and will take years to sell.
8. And with no telling whether interest rates are to increase or decrease in the next few years, there’s a chance that investing in renovations to add value to your property could be more costly this year than in the period to come. This is especially true for properties that need regular maintenance.
9. While that risk is not set in stone, it’s always something to consider when you’re dealing with potentially thousands of dollars on aesthetic renovations.

5. Businesses Snagging Opportunities
6. Another likely phenomenon that may occur with rising interest rates is decreased consumer spending. Australians may choose to be more conservative with their budget, causing a slower turnover of real estate properties from person to person.
7. Furthermore, this may also persuade current homeowners to look into renovating their homes rather than buying a new one entirely.
8. This increased demand for home renovations could entice businesses to join in on selling goods and services related to home renovation as a way for them to score in on this demand.
9. This may increase competition, supply, and availability of certain goods, helping the prospecting home renovator to score in on better deals than they may not have otherwise gotten without the interest rate hike.