How to finance your home renovation

There comes a time when a reno becomes more than something you just talk about, it’s something you start trying to make happen. It’s usually about this time that you start thinking about funding a home renovation. After all, renovations can be costly – how are you going to pay for it?

Your home renovation financing options explained

Your home renovation financing options can be many and varied – from existing funds to a new loan or even tapping into any equity you’ve built up in your home. What you choose depends on your position and whether you’re looking to renovate a new purchase or an existing home. So, what kind of renovator are you?

I’m looking to buy a home that needs renovating

If you’re looking for that next renovator, you’re obviously comfortable with the fact that the cost of your home is going to be more than just the purchase price; you need to factor in renovation costs when you buy the home. So where is the money going to come from?

  • Savings – the obvious starting place is to use existing funds. This may mean you have to save for longer until you have enough in the bank for deposit, fees, stamp duty AND the actual renovation.
  • Borrow at a higher Loan to Value Ratio (LVR) to fund the renovation – you might have enough saved for a 20% deposit, but if you’ll need to use some of your savings for renovations, then you’ll need to borrow more and that will give you a higher loan to value ratio. This might mean you now have to pay LMI (lenders mortgage insurance) and could also increase your risk of approval if your LVR is getting too close to the 90% mark. The higher your LVR, the less lending options you might have and higher interest rates might apply.
  • Buy a cheaper home – you might choose to downscale what you’re looking for, buying for less than you’d originally budgeted, meaning a smaller deposit is required and you can save your funds to use for a renovation.

I own a home that I want to keep living in, but it needs a makeover

If you already own your own home, your home renovation financing options are a little bit different as you likely have an existing mortgage. Unless you have the funds saved (which is easier for a smaller renovation but might not be realistic for major construction), you’ll need to look at borrowing.

  1. Drawing on equity with existing loan – depending on your loan type, you may be able to draw on your equity (the difference between the value of your home and your current loan amount) through your existing loan.
  2. Redraw – depending on what kind of loan you have, you may be able access the additional repayments you have made on your loan, over and above the minimum repayments 
  3. Personal loans – you might be able to take out a personal loan for home renovation. This is a more feasible option for smaller loans, as the amount available for personal loans is often capped.
  4. Credit card – if you’re looking at a small renovation you may be able to get access to a credit card with a low interest rate and then pay it off over time

I want to renovate my home, but I plan to sell it soon

Your home renovation financing options shouldn’t differ if you’re looking to renovate your home to sell it. However, if you need to refinance, ensure that your new loan fits with your plan to sell soon (for example, you wouldn’t want a fixed loan where you might face break fees for selling before the fixed period expires). You also should be especially careful not to overcapitalise as you might not be in the position to sell it if you’re going to be faced with a shortfall that you can’t repay.

I want to renovate my investment property

If you’d like to give your investment property a little love, either to improve its ability to be rented out sooner or increase its rental value, make sure you do your sums first. If you use existing funds, it’s essentially investing more into the property. If you borrow, either through a personal loan or tapping into your equity, it will increase your debt, so you want to make sure that whatever you gain outweighs what your costs are.

Borrowing against your home for renovations – where to start

The first thing to do is to work out the value of your home. This will give you an idea of how much you can borrow based on the amount equity you have. Don’t forget, you will need to have your lender value your home. You should also make sure that your lender agrees that what you plan to do adds value to your home. This should help you avoid overcapitalising.

What’s the difference between a home loan and a construction loan?

Traditional home loans are typically for buying an existing home, whereas construction loans are for new builds or for a knock down and rebuild. But you can also access a construction loan for major home renovations too. Whereas for regular home loans you typically receive a lump sum, for construction loans, you’ll make periodic progress payments at different stages of construction.

Looking to finance a home renovation? Compare our loan options today and find the right one for you. Enquire Now.