Using your existing home equity to renovate your home can be a great option. Find out how and compare your options with Savvy.
Fact checked
If you’re thinking of renovating your home or adding an extension, you may be wondering how to use your home equity to finance it. Using your existing home equity to renovate is often a great way of quickly and easily accessing the finance you’ll need. Find out how to use your loan equity to renovate, as well as compare your options for doing so, with Savvy today.
Home equity is the difference between what you owe on your home and how much it’s worth. Your home equity increases as you pay off your loan and the value of your house increases over time. For example, if you owe $350,000 on your home and it’s now worth $600,000, you have $250,000 worth of equity. You can use this as security to borrow more money to finance your renovations.
You can still only borrow 80% of the value of your home, though, so you’ll need to calculate your useable equity. In the example above, you may have $250,000 worth of equity, but 80% of the value of your home is $480,000, so your usable equity is the difference between 80% of the value of your home and what you owe. In this case, the usable home loan equity is $480,000 – $350,000 = $130,000. This is the amount a lender may consider loaning you if you want to use your home loan equity to renovate.
There are several ways to use your home loan equity to renovate, which include:
Your alternatives to using your equity include:
Redraw funds you’ve previously contributed
You may have been making additional repayments on your home loan to get ahead and pay less interest as you pay your loan off sooner. If you have a variable loan which allows redraws, you could redraw your additional deposits to pay for your renovation.
Use savings you’ve stashed away in your offset account or high-interest savings account
If you have an offset account, you may have been storing funds in this account to reduce the interest you pay on the principal you borrowed. If you do have savings in your offset account or a savings account, you could use these savings to finance your renovation, although of course you will lose the offset benefit of these funds and will pay the full amount of interest owed on your principal.
Take out an additional construction loan
Another option to finance your renovations would be to take out a separate renovation construction loan. To do this, you will need to provide all the usual information required for a loan application, including evidence of your income, your outgoings and your assets.
Naturally, you’ll need to prove that you can afford the repayments required on your new loan in addition to your existing loan. Construction loans are usually fixed interest-only for the building duration, then revert to variable principal and interest loans thereafter. Depending on the size of the renovations, you can borrow up to 95% of their value, meaning you’ll only need a small cash deposit upfront.
Approach your lender with a clear idea of how much you want to borrow so that you can receive the most appropriate advice. The best loan option for you will vary depending on whether you want to borrow $20,000 or $200,000 for your renovations.
If you have a healthy amount of home equity, it could be tempting to plan extensive renovations or major building works to increase the size of your home. However, it’s always worth looking around at the homes in your street to make sure that you don’t over-capitalise your home for the area you live in.
Once you’ve established some home loan equity, there are many options available to you when you want to use it to renovate. Take your time to do plenty of research to work out what your best loan option is, as there are many different types of loan available.
Once you’ve worked out what type of loan you require and how much you wish to borrow, use Savvy to help you compare lenders so you find a loan which is just perfect for you. Savvy has been helping Australians find and compare loans for over a decade, so we’re here to help you free of charge.
It can be cheaper to get a top-up to your existing mortgage with your existing lender compared to paying full loan application fees for another loan with a new lender.
It will certainly be cheaper using your home loan equity to finance your renovations in comparison to taking out a personal loan or using your credit card.
If you stay with your existing lender and top-up your existing loan, or split it and increase one portion of it to finance your renovations, you could save yourself the time it takes to go through the loan application process with a new lender.
It may look better on your credit record to have one loan with a single lender (albeit for a larger amount) rather than taking out a second personal loan possibly with another lender
If you get a loan top-up and increase the amount you borrow, assuming your mortgage repayments remain the same, it will take you longer to pay off your loan.
Naturally, you’ll pay more interest on the increased principal sum you owe, so your loan will cost more in interest overall. You can reduce the amount of interest you pay by increasing your loan repayments to cover the additional amount you’ve borrowed to pay for your renovations.
You may have been making additional repayments and watching your loan reduce with pride – but refinancing, by either topping up your loan or taking out another loan, will increase your debt and send you backwards in a financial sense.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
