Funding renovations

Renovations can be costly and stressful, but as long as you are increasing the value of your home, it can be a sound financial decision.

Here are the various finance options available:

1. Top up your current loan

• Since your equity typically increases over time, you can often borrow additional money on your existing loan.
• You can typically borrow around 80% of your equity threshold, assuming you can service the increase in debt.
• There is usually some paperwork involved in applying for a top up, but it is substantially simpler than taking out another loan.

2. Redraw from your current loan

• If your loan has a redraw option, you will be able to access any extra repayments you have made above the minimum requirement.
• Some lenders charge redraw fees, and you can only access up to the original loan amount, which may not be enough for larger renovations.

3. Refinance using a line of credit loan

• For small to medium-sized renovations, you can use the equity in your home to get a line of credit loan.
• You can access funds incrementally and only pay interest on the portion used, which is ideal for paying for tradespersons and materials as the work progresses.
• There are no minimum regular repayments so it is up to you to pay off the loan and ensure your balance doesn’t exceed the limit.
• It is an ‘at call’ facility, so you could be asked to repay the full amount at any time.

4. Refinance using a construction loan

• Typically used for building from scratch or larger structural renovations.
• The maximum amount you can borrow is based on the predicted value of the property at completion, not the current value, which gives you access to more funds.
• You can drawdown the loan in stages, corresponding to the stages of the build, and interest is only calculated on the amount that has been drawn down.
• You will usually have to provide council approved plans and a fixed price building contract to get loan approval.

5. Take out a personal loan

• If you don’t have enough equity (less than 20%) or collateral for other loan options, and are just looking at a small renovation (up to $30K), you can opt for a personal loan.
• Interest rates are usually higher than for home loans, although lower than for credit cards.

Regardless of how you finance your renovation, do your research to make sure you are adding value and therefore improving your financial position. Done properly, renovating can be a cheaper option than moving, and if you do decide to move, it can ensure you maximise your sales price. Renovating can even increase your equity if you want to borrow for investment purposes. As always, make sure you consult a good mortgage adviser to help you decide which loan is right for you.