How to fund a renovation

1.    Equity release/top up home loan

An equity release/top up loan is probably the most common way people borrow money when they want to renovate. It involves borrowing against the current value of your home before any value-adding renovations and in most cases allows you to obtain the funds upfront.

If you own your home outright, you can usually borrow up to 80% of its value.

If you have a mortgage on your home, the amount you can borrow is usually the difference between the balance of the loan and 80% of the value of the property.

For example, if your home is valued at $500,000 and your loan balance is -$300,000, you could borrow $100,000 – making the total loan amount $400,000 (80% of $500,000).

One potential problem is that the cost of your renovations may be higher than the equity you have available. If you run out of funds mid-construction, and if the property is then not in sound, lock up condition, you may have an issue obtaining extra funds down the track.

How much you can borrow will also determine whether you can use equity to pay for your renovation.

The ability to repay any increase in debt is required, so just because you have $100,000 in equity doesn't imply you may borrow that much.

2.    Construction loan

If you're planning to completely transform your home and undergo a major makeover, a construction loan may be a good option as you can spread the cost over a long period of time.

With a construction loan, the lender will assess the value of your home after the renovation based on the building plans and you can typically borrow against that value. You may be able to borrow up to 90% of the end value of your home and take advantage of mortgage interest rates, which tend to be lower than credit card and personal loan rates.

 You won’t be given the full loan amount upfront, but usually in staggered amounts over a period of time – these are called ‘progress payments’ and are linked to a fixed price building contract you will have with your builder.

3.    Line of credit

You can establish a revolving credit line that you can access (up to your approved limit) whenever you want.

You only pay interest on the funds you use and, as you pay off your balance, you can re-borrow the unused funds without reapplying if necessary.

However, care must be taken not to get in over your head in terms of serviceability. Make sure you can make repayments on the line of credit that will reduce the principle because your minimum repayment only pays the interest – it will not reduce the loan balance.

Interest rates on this type of product are typically much higher than a construction loan or equity release loan.

4.    Personal loan

A personal loan may be a good option if you’re only making minor renovations.

Personal loans are usually capped at around $60,000, but interest rates on personal loans are higher than on home equity loans and payments need to be made, usually, over a maximum of seven years.

5.    Credit cards

Using credit cards to fund renovations should only be considered if you want to undertake really small projects.

The interest rates are usually much higher on credit cards than mortgages, but for a very small project that extra interest might actually total less than loan establishment fees.

6. Ensure your renovations are adding value

There are very few exceptions to the rule that your renovations should add more value to your home than they will cost to carry out.

Think about how the money you spend on a renovation will increase the value of your property. For example, consider making changes that would appeal to the majority of potential buyers to help you sell your house faster and at a higher price.

7. See if you’re eligible for the HomeBuilder grant

The HomeBuilder award provides a $25,000 financial boost to those who are building new houses or renovating their current homes. The subsidy is being offered by the federal government to help the construction sector recover from COVID-19

8. Use redraw (if available)

Another possibility is to redraw money from your mortgage to pay for improvements, although this would depend on how much you have available. Redraw options are not accessible on all loans; they are on our variable rate home loans but not on our fixed rate loans. Check your internet banking to see how much you may redraw.

However your loan's outstanding balance will go up if you select this option. As a result, you pay higher interest rates and are probably facing higher payback amounts.

9. Refinance your existing home loan

To get more funding for your renovations, you can think about refinancing your current mortgage. Your home loan may be transferred from another lender as part of refinancing. As an alternative, you could  switch from a fixed rate to a variable one. Debt consolidation may also be used in home loan refinancing. By consolidating all of your debts—including credit card and personal loans—into a single payment, you might cut your expenses.

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