Renovating your home is a great way to not only update your living space but also increase your property’s value. That’s why lenders offer homeowners a variety of options when it comes to funding home improvements. So, which one is the best for your needs?
What are my home renovation loan options?
Borrowing against your home equity
A common way for those currently paying off their home loan to fund home improvements is through their home equity. Equity in your home is the difference between its value and the outstanding debt on it. For example, a home worth $800,000 with a $500,000 mortgage balance would have $300,000 in equity.
Borrowing against equity can be done in two ways:
- Refinance your current loan and increase your loan amount to incorporate some of your existing equity
- Request a top-up from your lender and have your requested amount added to your home loan
Lenders base the amount you can borrow on usable equity, which is 80%. This means that in the above example, the most you’d be able to borrow would be $240,000, as that’s 80% of the $300,000 equity. When it comes to home loan top-ups, the minimum can range from as little as $5,000 to as much as $20,000 depending on your lender.
These funds are flexible in how they can be used, encompassing renovation costs and potentially other outstanding debts.
Taking out a construction loan to renovate
For more significant renovations in the hundreds of thousands of dollars, a construction loan may be an option for you. This is a specialised loan catered specifically to the needs of new builds, with portions of your loan amount released at several stages in the construction process.
Because construction loans aren’t tied to your home equity, there’s no set maximum amount required. Your borrowing power will be determined by factors specific to you, such as your income, credit score, job stability, savings and home value.
Unlike when drawing on your home equity, though, the funds are for the construction and renovations only. It may be suitable if you’re planning a major extension, constructing an in-ground pool or even building a granny flat.
Home equity loans vs construction loans
| Home equity | Construction | |
|---|---|---|
| Amount you can borrow | Up to 80% of overall equity | Up to your personal borrowing limit |
| Method of funding | Released in one lump sum | Paid to builder in instalments as construction milestones are met |
| What you can use it for | Home renovation expenses and other necessary costs | Renovation and building expenses only |
| New loan application | Yes for refinance, no for top-up | Yes |
| Available loan term | Up to 30 years | Up to 30 years |
Taking out a personal loan
The third and final option when it comes to renovation loans is taking out a personal loan. These are comfortably the quickest and most flexible in terms of the application process and potential usage, as they’re (more often than not) unsecured.
Being unsecured means the amount you’re able to borrow is tied solely to your profile and has nothing to do with the value of your home. The maximum available amount for unsecured finance is between $50,000 and $75,000, depending on your lender, starting from a minimum of $5,001.
Like with equity, you can essentially use your loan funds however you like, including for multiple purposes on the same loan. For example, you could take out a loan to pay for your kitchen remodelling and for debt consolidation to clear your credit card bills.
Why apply for a home loan with Savvy
The pros and cons of renovation loans
Pros
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Makes your renovations possible
In the same way that a home loan can make your home ownership goals a reality, a loan can bring renovations that were otherwise unobtainable within your grasp.
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Avoids eating into your savings
Rather than taking a significant chunk out of your savings, a loan allows you to keep your cash reserves intact for your other crucial expenses and potential emergencies.
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Can be fast and convenient
Depending on the type of loan you apply for, the process could be over and done with in a matter of days.
Cons
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Can significantly increase interest cost
By topping up your loan or taking out a new one, you’ll potentially significantly increase the amount you’ll pay on interest overall.
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Interest rates may be higher (for personal loans)
Unsecured personal loans generally come with higher interest rates than home loans, so you could be slugged with a high rate if you choose this option.
Types of home loans
How else can I fund my home renovations?
Outside of loans, there are a few other options for accessing the cash you need for your renovations. These include:
Redrawing from your home loan
If you’ve made additional payments towards your home loan and have a redraw facility as part of your package, this may be your ticket to completing the renovations. Doing so saves you from taking out another loan and going through another application process.
However, it’s important to consider that redrawing from your home loan can partially or entirely erase the benefits of early repayments. As your balance bounces back up, so too will the interest you’re required to pay. If you’ve paid enough to shorten your loan term, this will extend back out as well.
Withdrawing funds from an offset or savings account
Alternatively, if you have the cash in an offset account or a separate savings account, you could pay for your renovations that way. This is the quickest and easiest way to do it and, if it’s in a savings account, it doesn’t impact your current home loan.
There are risks associated with pouring your savings into renovations. If doing so takes up most or all of your savings, you may not have enough to cover other costs that pop up or emergencies. You should never leave yourself in a financially precarious position for the sake of doing up your home.
If you decide to cover home improvements with your savings, here’s what you should look to do:
- Budget for emergencies when deciding how much of your savings to give up
- Look at whether you can buy fittings, appliances and materials separate from labour costs to potentially save money (or take out a No Interest Loan if you’re an eligible low income earner)
