How to finance home renovations: Refinancing, equity and other options

You can pay for renovations with savings, money available through your home loan, or a separate loan. If you have enough equity and can afford the repayments, you may be able to increase your mortgage or refinance to borrow more. For major renovations, a construction loan that pays your builder in stages might be suitable.

The right option depends on the work, how much it costs and how quickly you can repay the money. A kitchen refresh and a second-storey extension are likely to need different funding arrangements.

Before comparing loans, work out your renovation budget and leave room for unexpected costs. Then compare how much each funding option would cost over the time you expect to repay it.

For smaller jobs, using money you already have may be simpler than applying for another loan. But consider what you would have left for emergencies once the work is paid for.

If your savings are in an offset account, spending them reduces the amount offset against your mortgage. Your loan balance stays the same, but you will generally pay more interest.

Redraw works differently. It lets you access eligible extra repayments you have already made into your home loan, subject to your lender’s rules. Redrawing increases your outstanding loan balance and the interest you pay compared with leaving those repayments in the loan.

Using offset savings or redraw can increase your mortgage interest. Spending offset savings reduces the amount offset against your loan, while redrawing extra repayments increases your outstanding loan balance. Check your lender’s redraw limits and fees before accessing the money.

A home loan top-up lets you apply to borrow more through your current lender. It may be worth exploring if you are happy with your mortgage and don’t want to replace it.

The lender will assess the additional borrowing and may arrange a valuation. It can also ask for renovation quotes or other evidence of how you will use the money.

Ask whether you can keep the renovation borrowing in a separate loan split. This can make it easier to track and repay over a shorter period than the rest of your mortgage. Check the rate, fees and repayment options offered for that split.

Refinancing replaces your existing mortgage with a new loan. With cash-out refinancing, you borrow a larger amount and use the additional funds for an approved purpose, such as renovations.

For example, you might replace a $500,000 mortgage with a $560,000 loan and use the extra $60,000 for the work, before allowing for any financed fees.

This gives you an opportunity to review your existing rate and features as well as arrange funding. However, compare the cost across the whole mortgage. A less competitive rate on your existing debt could outweigh the benefit of accessing renovation funds.

The amount available also depends on your equity and borrowing capacity.

A construction loan may suit an extension or major renovation where the builder receives progress payments.

Rather than releasing the entire construction amount upfront, the lender pays approved amounts as stages of work are completed. Interest is generally charged on the funds drawn. Any existing mortgage balance continues to attract interest.

You may need to provide a building contract, plans, approvals and other documents before funding is approved. The lender may also require inspections before releasing payments. CommBank’s construction loan information illustrates how this staged process works.

Check that the lender’s payment process matches your building contract, including how you will fund the initial deposit and any costs the loan doesn’t cover.

A personal loan may suit a smaller renovation where changing your mortgage would involve too much cost or administration.

The interest rate on an unsecured personal loan is generally higher than a home loan rate. However, a shorter repayment term may help you clear the debt sooner.

Compare the total cost over a realistic repayment period. Funding a small project through a mortgage isn’t necessarily cheaper if you take 25 years to repay it.

Some lenders may offer a property-secured line of credit, allowing you to draw funds up to an approved limit. Availability is limited, so check whether your lender offers one and compare its costs and repayment requirements with a standard loan top-up.

Equity is the difference between your property’s value and the amount you owe on it. You generally cannot borrow against all of it.

A common starting point is to calculate how much additional borrowing would keep your total loan within 80% of the lender’s assessed property value.

For example:

Note: $140,000 is an estimate before fees and the lender’s affordability assessment. It is not an approved borrowing amount.

You may be able to borrow more than 80% of your property’s value, depending on the lender’s criteria. However, you may need to pay lenders mortgage insurance (LMI), which protects the lender if you cannot repay the loan. Some borrowers qualify for an exemption.

The lender’s valuation also affects how much equity you can access. If it values your home below your estimate, you may be able to borrow less than expected. Confirm the approved amount before committing to renovation costs that depend on the loan.

Having enough equity is only part of the assessment. The lender also checks whether your income can cover the larger loan after allowing for living expenses and other debts.

Banks generally assess whether you could afford repayments at an interest rate at least three percentage points above your loan rate, under APRA’s serviceability requirements. For example, a loan charging 6% would generally be assessed at at least 9%. This is a repayment stress test, not the rate you will actually pay.

Non-bank lenders have their own assessment policies and are not subject to this same APRA requirement. They must still assess the application and meet applicable responsible lending obligations.

You should also test your own budget. The amount a lender approves may leave less room than you would like for reduced income, higher bills or additional building costs.
What does renovation finance cost?

Depending on the loan and transaction, costs may include application, valuation and settlement fees, ongoing account fees, LMI or other lender charges. Switching lenders may also involve discharge fees and fixed-rate break costs. Construction loans can have inspection or progress payment fees.

Ask for a written cost breakdown before deciding. Moneysmart’s guide to switching home loans explains the charges to compare and why the remaining loan term matters.

Adding renovation costs to your mortgage can make the monthly repayments look manageable because the debt is spread over many years. That longer term can also mean paying substantially more interest.

If you have 20 years left on your mortgage, compare refinancing over 20 years before considering a new 30-year term. You can also ask about repaying the renovation portion sooner.

When comparing a top-up, refinancing and a separate loan, use the same renovation budget and account for all repayments and fees. A simple switching break-even calculation is not enough if the new mortgage includes additional borrowing or a different term.

You can test different amounts and repayment periods using Bheja’s mortgage calculators.

Start with a clear scope of work and itemised quotes. Make sure you understand what is included, what is an estimate and what you would need to pay separately.

Your budget may need to cover more than labour and materials. Consider design and approval costs, temporary accommodation, storage and a contingency for unexpected work.

For major renovations, understand how changes to the building contract will be priced and approved. Consumer Affairs Victoria’s building contract guidance explains the importance of clear specifications and progress payments. Building laws differ across Australia, so check the requirements in your state or territory.

Your lender may also need:

• Income documents, bank statements and current mortgage statements.
• Details of credit cards, personal loans and other debts.
• Renovation quotes and a breakdown of your contribution.
• Building contracts, plans, approvals and insurance documents, depending on the project.

Confirm the finance and conditions for releasing funds before making commitments that rely on the loan being available. If the work changes, tell your lender early; approval for the original budget doesn’t automatically cover a cost increase.

Interest on money borrowed solely to renovate the home you live in is generally a private expense and not deductible.

Interest on borrowing used for rental property renovations may be deductible, depending on how the property and funds are used. The renovation costs themselves have separate tax rules and may need to be claimed over time rather than immediately.

The ATO’s guidance on rental interest expenses makes an important distinction: deductibility depends on the use of the borrowed money, not simply the property offered as security. Borrowing against an investment property to renovate your own home doesn't make the interest deductible.

If the property is rented, partly rented or may become a rental, get tax advice before arranging the borrowing. Keep invoices and records showing where the funds went.

Renovations pay back in daily comfort, and sometimes in value, but they also cost equity and add years of interest, and that trade deserves a clear head. My view is that the best projects are the ones you have priced twice, with a contingency, and tested against your repayment capacity before signing anything. Equity once spent on a larger mortgage is not easily rebuilt, so borrow for the work that matters most and stage the rest. Run scenarios, keep some cash aside, and talk to a broker or accountant where the tax or structure is unclear. — Pravin

Before increasing your mortgage, it can help to check how your existing loan compares.

Bheja’s Home Loan Health Check lets you compare your current rate with available market rates. A lower advertised rate is a starting point for further checks, rather than confirmation that refinancing will suit your renovation.

You can also connect with a licensed mortgage broker through Bheja for an obligation-free discussion about a top-up, refinancing or other funding options.