Ask Paul: Is our dream home worth less than we paid for it?

Q: My husband and I bought our first owner-occupied home 16 months ago in our dream location. It's a lifestyle property on two hectares in a regional Victorian town.

Although it's our first home we plan on staying in the property long term and want to renovate the kitchen and bathrooms to make it into our dream home as well.

The renovations would be to our own taste as it is our owner-occupied property and we have had no regard for the other houses in the area, as we have no plans to sell or use it as an investment property.

We put all our savings into the deposit and got a loan at an 80% loan-to-value ratio (LVR).

Our plan was to refinance and access equity to complete the renovations.

However, a desktop valuation was recently obtained from one of the major banks and it came in $25,000 lower than what we paid for the property.

This could be due to one of the major power stations nearby closing down and there being limited comparable sales in the past three months for properties on acreage. We are now currently sitting at about 81% LVR based on the desktop valuation.

Our question is, should we obtain a personal loan or other unsecured finance to renovate and try to refinance again after the renovations are completed?

Or should we wait and build up equity by making extra repayments to the loan? Or do you know of any other options that may be available for this scenario? - Stella

A: Desktop valuations, in particular in regional areas with acreage, are more guesswork than science. They also tend to be super conservative.

So I think your first step is to seek a second opinion. I'd be talking to a local lender such as a building society or credit union. If that confirms the recent valuation, then I agree you have to look to other options.

The biggest issue for me is something you did not mention: your incomes.

I do get your point that this is a lifetime property for you, so a new kitchen and bathrooms will not only add value but will bring lasting pleasure. If you have relatively high incomes a lender will be more inclined to make a loan extension work for you, or at least a very low-cost personal loan.

If, however, money is tight, I really cannot encourage you to take on potentially high-interest debt to renovate. It could put your dream home at risk. If this is the case, I would recommend that you bide your time and build your savings.

Get stories like this in our newsletters.