Renovation or home improvement loans can add significant value to your property. There are a few types of home renovation loans you can apply for. These include personal loans, mortgage finance and construction loans. Depending on the loan, you could borrow between $2,000 to $100,000.
What type of home renovation loans can I apply for and how do they work?
There are several ways to finance your home renovations. The best loan for you would depend on your circumstances and the kind of improvements you want to make. Your options include:
|Unsecured personal loans||An unsecured personal loan allows you to borrow money without using an asset as security.|
These loans are generally flexible. You can use it to pay for anything you like, such as a holiday, a car or home improvement.
Compared to secured loans, these loans usually have higher rates and fees. This is because you are borrowing without offering an asset as security.
You could borrow up to $50,000, although some lenders may offer more.
The terms are usually between 1 and 7 years.
You could opt for either a fixed interest rate or a variable rate. You could also get a personalised rate based on your credit score.
|Secured personal loans||A secured personal loan allows you to borrow money by using an asset as security. For home renovations, you could use your house as security.|
If you have a mortgage, you could also use the equity in your house as a guarantee. Your equity will have to be more than the loan amount to qualify.
Secured personal loans generally have higher borrowing limits, sometimes up to $100,000. But this depends on the value of your asset.
The interest rate is also often lower. This is because the risk to the lender is lower as you’ve offered collateral. Low risk incentivises the lender to offer a better rate.
Loan terms can also be up to 10 years.
|Green loans||A green loan is a personal loan designed for green and sustainable home upgrades.|
These loans come with lower rates and flexible repayment terms. But they have restrictions on how you can spend the funds. Your renovations will be limited to green additions or upgrades.
Green loans may be secured or unsecured. Loan terms vary from 6 months to 7 years.
Borrowing limits are also flexible, based on the upgrades you need to make.
You can use it to purchase a solar power system, a solar hot water system or energy-efficient appliances. You could also use it to add energy-efficient heating and/or cooling, installation of insulation and double glazing for windows.
|Mortgage finance||If you already have a mortgage, you could refinance or remortgage your loan. This can give you a little extra cash to spend on home improvements.|
If you have equity on your home, you could use it to refinance your mortgage and get a better deal. You could either talk to your current credit provider or find another lender offering better interest rates and fees. Refinancing can help you access funds to renovate your home.
If your home loan has a redraw facility and you’ve made extra repayments, you could also use it to fund your renovations.
|Construction loans||A construction loan is a home loan for people who are building a home or undertaking major renovations.|
This loan is ideal if you wish to receive funds in instalments.
Rather than a one-off payment from the lender, you will receive the pre-agreed funds in stages.
This allows you to pay your bills at various stages during the renovation. You will have to work out a payment schedule with your lender and, most importantly, stick to it. The amount you borrow is still fixed, but you will receive it bit by bit.
With construction loans, you will only have to pay interest on the amount used and not the entire loan.
Some construction loans begin with an interest-only period. This means that while the renovations are ongoing, you will only be charged interest on what you borrow. After the renovations are complete, you will revert to paying back the money borrowed plus interest.
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What can I use a renovation loan for?
You can use a home improvement loan for a number of renovations. Some of them may be common fixes, like remodelling your kitchen. Some of them may be less common, like a star-gazing roof or hidden storage. It’s a good idea to identify what you want to accomplish before you begin. You could look into making stylistic, structural, functional or green changes to a house. Once you’ve identified what you need, you can use the loan for:
- Kitchen remodelling
- Bathroom remodelling
- Adding a swimming pool
- Green/energy-efficient additions (solar panels, new windows, insulation, etc.).
- Home repairs
- New exteriors
- Garden landscaping
- New furniture
- Adding storage space
Is it difficult to get a renovation loan?
All lenders, regardless of the loan you apply for, will consider your credit history. If you have a good credit history, you should be able to get a loan without difficulty, granted you can afford it.
Most lenders will ask for details about your income, employment, current liabilities, ongoing debts and defaults. They are also unwilling to lend if you have been or are currently bankrupt. It may also be difficult to get a renovation loan if you’re currently facing financial hardship.
While this is generally the case with most renovation loans, you may have some flexibility with a secured personal loan and even mortgage refinancing.
While it is no guarantee, lenders may consider you for an unsecured loan even if you have less than perfect credit. This is because the loan is less risky to the lender as there is an asset attached to it. However, you may not get the best rate as interest rates are based on your risk profile. While secured loans are less risky for lenders, you could potentially lose your asset if you default on the loan.
With mortgage refinancing, you could speak to your current credit provider and see if they are willing to refinance it for you.
You could also check if another lender is willing to refinance your loan. Or you could speak to a mortgage broker, who may be able to point you in the right direction. Some specialist lenders may consider refinancing your mortgage. But if you have a risky credit profile, your interest rate is likely to be higher.
You should keep in mind that all loan applications are entered into your credit report. Multiple loan applications and rejections can drive down your credit score. This can make it more difficult to get credit in the future.
What should I consider when applying for a renovation loan?
You should ask yourself the following questions before taking out a renovation loan:
- Can I afford the repayments?
To calculate the cost of your home improvement loan, you should account for both the interest rate and the comparison rate. The comparison rate includes the loan’s fees and charges, and is often more than the interest rate. It gives you an indication of how much the loan will actually cost. You should also consider your loan term and repayment frequency. This can help you determine if you can afford the loan. You can use our loan calculator to help you with this.
- How flexible is my loan?
Look out for whether your loan allows you to make additional repayments or redraw funds. Some loans may also allow you to pay off the loan early, without penalties. You may also be given the option to change the loan terms if needed.
- Have I applied for the right amount?
Borrowing too much or borrowing too little can be a problem. How much you borrow – that is your loan principal – will affect your interest rate. If you borrow too much, it will cost you more money. If you borrow too little, it may be difficult to get additional finance to complete your renovations.
Tips for comparing home improvement loans
When you’re comparing loans, you should consider the following to aid your decision:
- Loan type. The type of loan you choose should meet your needs and situation. For example, you could have a high interest rate on your home loan. If so, you may want to go for a personal loan with a lower rate rather than adding it on to your mortgage. On the other hand, having a single payment to make could be more convenient for you.
- Loan purpose. If you want to make your home sustainable and green, you may want to look into a green loan. If you want to make various types of improvements, you should look for a loan that gives you the flexibility to do so.
- Loan costs. Consider the comparison rate and the interest rate. Note all the fees included and the rate when making your calculations. A lower rate doesn’t always mean a cheaper loan, as it may come with high fees.
- Repayment options. Will the repayment plan affect your cash flow? If you get paid monthly, you may want to opt for a lender who allows you to make monthly repayments.
- Flexibility and additional features. Look into whether you have additional features like extra repayments and redraw facilities. Are these features free, or do you have to pay for it?
Will renovating add value to my property?
Renovating your home can and often does add significant value to your property. But not all renovations are created equal, nor do they all add value. Some may even make your home lose value.
Before you begin renovations, you should first establish its purpose. For instance:
❓ Do you want to improve your home to enhance your lifestyle?
❓ Do you intend to make more money by renting your property?
❓ Do you plan to sell the property and increase your profit?
Your purpose should act as a guide to your renovations. Once you have a guide, you can plan how to add value and what you can afford.
How can I add value to my property while keeping costs down?
Keeping costs down can maximise your potential value increase. You can do this if you:
- Add value with creative fixes. Homebuyers pay special attention to a home’s bathroom and kitchen. You could make a run-down bathroom or kitchen more functional and pleasant, while keeping costs down. With cosmetic renovations, it may be best to limit the changes to what is in plain view.
- Keep a tab on expenses. Plan and budget ahead of time, and stick to it. When budgeting, you should take into account the cost of materials as well as labour. Make sure your budget accounts for all the renovations you need to make.
- Consider DIY. DIY can help you keep costs in check. This is because you will not be paying for additional labour, which can be expensive in Australia. However, you need to have access to the right tools and skills. A bad DIY job will do more harm than good to the value of your property, so if you’re not confident, don’t risk it.
- Compare your alternatives. Take the time to shop around and negotiate. You could potentially save money on supplies and labour. It’s also important to apply the same principle to home improvement loans. The comparison table and tips in this guide can help you find the best deal for you.
- Think long-term. This is especially important if you plan to continue living in your home. This is because you stand to personally benefit from it. Energy-efficient additions can be a plus (for your bills and the environment). By opting to go green, you may also qualify for certain rebates.
Which renovations will not add value to my property?
This may be difficult to believe, but some renovations could decrease the value of your property. If you want to add value, you may want to be wary of these:
- Unusual furniture fittings or colours
If you’re planning to sell at a profit, it may be best to stick to modern and neutral decor. This is because your preferences may not be the same as a potential buyer’s.
While DIY is a great way to keep costs down, it can also backfire on you. If you don’t know what you’re doing, you may do more harm than good. It may be better to hire a professional in such cases.
Swimming pools may be viewed as high-maintenance and difficult to remove. If you want to add a swimming pool to your home, you should consider whether it’s desirable in the area you live in. You should also consider how long you intend to stay at the property.
Removing a wall and joining 2 smaller rooms can be a great way to increase space and light in your home. However, this means that you have fewer rooms, which can drive down the value of your property.
It’s best to make sure that your renovations are all above board. If you require permission from the council, you should make it a point to get it. If you add rooms to your property that are not approved by council, you will not be able to market the property with those rooms.
Am I eligible for a renovation loan?
The eligibility criteria between lenders differs. Most renovation loans require that you are:
✔️ Over the age of 18
✔️ A citizen or permanent resident of Australia
✔️ Depending on the lender, have a good to excellent credit score
✔️ In regular employment
✔️ Receiving regular income
You will need to provide the following documents for a home improvement loan. Depending on the lender, you may be asked for more:
✔️ Proof of identification. An Australian driver’s licence or passport.
✔️ Proof of address. This might be a utility bill or bank statement.
✔️ Proof of income. This could include your employer’s name and contact details.
✔️ Details of assets. You will need to show proof of ownership of your home and other assets.
✔️ Details of liabilities. You will need to declare any outstanding debts, such as other loans or credit card debts.
How can I apply for a renovation loan?
🤔 Work out what type of loan to apply for, how much you need to borrow and what you can afford.
🔎 Start comparing lenders and loan products. Don't forget to compare interest rates, fees and eligibility criteria. You can use Finder’s comparison table.
✅ Select a lender. Click “Go to site” to be directed to the lender’s page, or “More info” if you want to read about the lender.
🖨️ Organise and prepare the required documentation. This will make the application process easier.
📱 Apply. Most lenders have their applications online.