There comes a time when home improvement 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 the different home renovation payment plans out there. After all, renos can be costly – let’s find the right option for you (so you can get back to your vision board!).

Your home renovation finance options explained

Your home renovation financing options can be many and varied – from existing funds to a new home improvement 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 want to renovate my house - where do I start?

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.

• 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. 
• Redraw: Depending on what kind of loan you have, you may be able to access the additional repayments you have made on your loan, over and above the minimum repayments. 
• 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.

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 lenders mortgage insurance (LMI) 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 want to renovate my home, but I plan to sell it soon

If you’re wondering how to add value to your property before putting it on the market, doing home renos is a great idea. However, if you need to refinance, ensure that your new house renovation loan fits with your plan to sell soon (for example, you wouldn’t want a fixed loan where you might face break costs and fees for selling before the fixed period expires).

You should also be especially careful not to overcapitalise as you might not be in a 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 of 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.

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