Home loan top-ups or refinancing leverage your home equity at lower interest rates.
Australians average $272,085 for renovations, so compare home loan top-ups or refinancing for best rates.
For smaller projects or limited equity, personal loans are faster but often have much higher interest rates.
Renovating your home or investment property can add some serious value to its overall worth and improve the way to live in and use the property.
But how should you pay for it?
Back in 2021 almost half of Aussies in a Finder survey said they could afford to fund their renovation out of their savings. But 53% said they needed access to some sort of lending.
Australians borrowed around $847 million for renovations just in July 2024 alone, according to the Australian Bureau of Statistics. That's record levels, up by 69% from even the July before. On average, it works out as around $272,085 per loan.
If you're thinking of borrowing for your renovation, let's look at some ways you can do that.
Option 1: Home loan top-up
A home loan top-up is a way of tapping into the equity you have in your home. You can ask your lender to revalue the property, with the hope that they will value the property at a higher amount.
For instance, let's say you purchased a home for $800,000 five years ago with a loan of $720,000. You've made some headway with the loan, so it's now paid down to $650,000. You request a current valuation from the lender, and it comes up at $900,000.
You can draw out cash from your loan to fund your renovation. Banks will generally lend you up to 80% LVR without charging you lenders mortgage interest (LMI). In this example, 80% LVR of the new value is $720,000.
This means you can borrow $70,000 – the difference between your current loan and the maximum 80% LVR. If you wish to borrow more than this, you'll pay LMI.
Pros
It's a low-interest option for funding a renovation.
A home loan top-up is a fairly simple process and can be processed quite quickly.
You won't have to apply for an entirely new loan.
You will only have one single home loan and repayment to worry about, as you're taking on a separate debt for the renovation.
If you've built up a lot of equity, you could be able to draw out a significant cash amount.
Cons
You'll be adding to your original debt, meaning it could take you longer to pay off your home loan overall.
You'll pay more interest in the long run.
Your repayments will rise, so you'll need to budget to make sure you can afford your new repayment amount.
This option is very similar to the first option in that you are topping up your existing home loan. The difference is that in this version your lender lets you borrow based on its predicted value of the home post-renovation.
Let me explain.
Let's assume your situation stands as it did in option 1. You want to add in a new kitchen and covered patio, and you request a new valuation from the lender based on your renovation plans. The lender estimates your renovation would add another $100,000 to the value of the property.
Your current situation is as follows:
House worth $900,000
Loan of $650,000
Projected value post-reno $1,000,000
Potential loan based on 80% LVR: $800,000
In this example, you can borrow up to $150,000 to fund your renovation without being charged LMI. You only need around $80,000, so you top up the loan to this value.
This loan would work in the style of a construction loan. This means that rather than paying out a sum of money all at once, the bank will generally make money available in instalments as the renovation progresses. They may need to see invoices from builders and contractors in order to release the next "draw down" of funds.
Expert insight
"A common question that comes up is: should I speak to a builder first or my mortgage broker first, to work out how much I can spend on my renovation? I would highly recommend speaking to your mortgage broker to work out your maximum borrowing capacity. At this stage you could also discuss the various options available to you based on your current circumstances and your dream plans for your renovation."
Managing director and mortgage broker, Atelier Wealth
Pros
It's a low-interest option for funding a renovation.
The application process is fairly simple and can be processed quite quickly.
You won't have to apply for an entirely new loan.
You will only have one single home loan and repayment to worry about as you're taking on a separate debt for the renovation.
If you've built up a lot of equity, you could be able to draw out a significant cash amount.
Cons
You'll be adding to your original debt, meaning it could take you longer to pay off your home loan overall.
Drawing down the funds can be a little more fiddly and requires ongoing communication between you, your contractors and the bank.
You'll pay more interest in the long run.
Your repayments will rise, so you'll need to budget to make sure you can afford your new repayment amount.
Option 3: Refinancing to a new loan
Refinancing your mortgage can be a smart way to fund your renovation and save you money on unnecessary extra mortgage interest at the same time.
Not only could you unlock the extra cash you need, but if you haven't looked at your home loan for a while you may be surprised at how much you could save with a better deal.
Compare your current home loan against other loans on the market to find one that suits all your needs and doesn't break the bank with a higher rate and fees. Use a borrowing power calculator to get an understanding of how much you can borrow, and what your repayments would be like with a higher mortgage.
Pros
It's a low-interest option for funding a renovation.
You could end up saving money on your mortgage, if you refinance to a lower rate.
You may benefit from a home loan cashback offer, usually between $1,000 and $4,000, to boost your renovation budget.
Cons
Refinancing requires a new mortgage application and this can take an average of 30 days, sometimes even longer during busy periods.
Refinancing can come with exit or switching fees from your old loan (especially if you have to break a fixed rate) and fees for the new loan.
Your new loan may default to a 30-year loan term, making it even longer until you own your home outright.
If you don't have much equity or the value of your property has fallen, then refinancing might be more challenging or could even cost you lenders mortgage insurance if your LVR rises above 80%.
Finder survey: What percentage of Australians refinanced to get a better overall home loan cost?
Response
Better overall cost
13.51%
Source: Finder survey by Pure Profile of 1112 Australians, December 2023
Option 4: Line of credit home loan
A line of credit loan uses the equity in your home to extend a credit limit to you that you can use for any purpose, including renovating, buying a car or going on holiday – the choice is yours!
Equity is the difference between what you owe on your home and its current value. For instance, if you owe $500,000 on your home loan and your home is valued at $750,000, you've built up $250,000 in equity.
A line of credit loan allows you to tap into this equity. Your lender will offer you a credit limit based on your equity, and you can use as much or as little as you like. Think of it like a giant credit card facility attached to your home loan, only every dollar you spend adds a dollar of debt to your home loan.
Pros
A line of credit loan offers a huge amount of flexibility since once approved, you can use as much or as little of your credit limit as you need.
You'll only be charged interest on the amount you've actually used for your renovation project.
Cons
These loan products usually come with a higher interest rate than standard home loans.
It can also be difficult to manage a line of credit home loan. You'll have to budget well to keep your project within your credit limit. Since you have easy access to the funds, it's very easy to overspend.
These loans can come with tougher loan criteria, which can make it harder to gain approval.
Your repayments will rise based on how much money you access, so you'll need to make sure you can afford your new repayment amount.
Option 5: Personal loans for renovations
If none of the above mortgage options work for you, then perhaps a personal loan is the way forward.
Finder research reveals that around 17% of Australians would consider using a personal loan to pay to bring their renovation plans to life, and a further 4% would use a credit card. A credit card should be your absolute last resort, as the high interest rates can add a hefty premium to the total renovation cost.
However, a personal loan may be a reasonable option if your renovation is small and won't require a significant expenditure.
Pros
Personal loans are often processed quickly, so you could have the funds in your account shortly after applying.
If you're borrowing a small amount, they can be a fast, convenient way to fund your renovation.
Cons
Personal loans often carry high interest rates, especially unsecured loans – definitely much more than you'd pay in mortgage interest rates. Rates can vary significantly from one lender to the next, so it's crucial to compare your options.
You'll have to manage two repayments each month: your home loan and your personal loan.
The payments need to be spread out over a maximum of seven years with a personal loan, so with higher interest rates and a shorter repayment term, this is the more expensive option when compared to funding the renovation via a mortgage.
"Something to be cautious of is borrowing too little or too much money. You don't want to overspend on renovating and have to borrow more money, especially if you've already maxed out your home loan borrowing capacity. The best idea would be to make sure your estimated renovation cost is less than the amount you're able to borrow, leaving some extra space in case costs run over. If you're thinking of playing it safe and borrowing extra money, make sure you can afford the higher repayments that comes with that, but also that you can make extra repayments. Any money you have left over can then be put back towards your loan, so you're not paying interest unnecessarily on unused funds.
"In deciding how you're going to finance and how much you're going to borrow, it's all a case of really considering what will work for you and planning accordingly."
Yes. If you have a home loan that you've been paying down, you can use the equity you now have in your home to increase your loan amount and use the extra money towards renovations.
If you're buying a property that you intend to renovate straight away, depending on your deposit size you may be able to borrow a larger amount to cover the cost of the purchase and the renovations. If you have less than a 20% deposit, you might find it more difficult. Check out our borrowing power calculator to see how much you could be able to borrow.
Typically, yes, renovating your home will be cheaper than building a home from scratch. Even if you're planning an extension, it will likely be cheaper than building a whole home.
The average borrowing for renovations is $272,085 according to the ABS. The average construction loan taken out is almost $599,000.
The best finance option for your renovation really depends on how much equity you have in your home, how much you have saved up and how big your renovation plans are.
If you've paid off a good chunk of your home loan and you work out that the equity you've built covers your renovation plans, topping up your home loan could be your best option. Your home loan has lower rates than a personal loan or line of credit, so you'll save big on interest. But remember that it's a big debt to increase.
If your renovations are small and you haven't really built a lot of equity, you might be better off considering a personal loan. But it's always worth talking to your lender first to see if they can roll it into your home loan because personal loan interest rates can be much higher.
Sarah is the author of How to Raise Rich Kids. With over 20 years of experience in property, finance and investment journalism, she is a trusted expert whose insights regularly appear across television, radio and print media, including Sunrise, Channel 7 News, Bloomberg and Yahoo! Finance. She has previously served as managing editor for Your Investment Property and Australian Broker. Her expert advice has been shared in the media over 4,000 times. Sarah holds a Bachelor’s degree in Communications and a Tier 1 Generic Knowledge certification, which complies with ASIC standards.
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