How to finance home renovations

Refinancing your home loan for renovations

Many homeowners who have seen the value of refinancing their home loan are now looking to the advantages that refinancing for renovations can provide.

The home loan market is extremely competitive and circumstances also change. Just because a home loan spans 20 to 30 years doesn't mean you should be locked into the same lender for that amount of time.

Furthermore, a mortgage is a big financial commitment; but it's also something that can give you significant financial leverage. So why not use that leverage to better the home you're in? 

This article will help you navigate refinancing a home for renovations while offering some alternatives and tips to help you before you start.

How does refinancing to renovate work?

The idea behind refinancing to renovate is to obtain extra cash which will fund your renovations. 

You'll refinance with a new or existing lender and increase the amount you owe to the lender, to gain the renovation capital. 

The benefit of this is you're getting a more competitive interest rate than you would get from a personal loan for example. These long term benefits should, in theory, outweigh any upfront costs. 

Start your refinancing plan by looking at what your home loan rate is and compare your home loan to other products. 

Often changing lenders may provide a better rate and features, but you'll have to pay for the costs of refinancing. Negotiating with your current lender and extending your loan with them may allow you to avoid these costs. 

Whichever of these avenues proves more suitable for you, be upfront about the extra required renovation funds and how they'll be spent. Different types of renovations can fall under different potential loans. 

A good rule of thumb for how much you should be spending on your renovations is to not spend more than 10% of the median property value. Use our repayment calculator to help see how much you should borrow. 

Things to keep in mind:

• If your property has decreased in value or you have little equity, you'll be less likely to be granted a refinance by a lender.
• If you're looking to borrow more than 80% of your property's value, you'll have to pay lenders mortgage insurance, which could cost you a fortune. 
• Refinancing requires a new mortgage application which could take weeks to process, even if you have all the necessary paperwork immediately ready. 

Alternative ways to finance a home renovation

Redraw funds to pay for the renovations

If you've been making additional payments on your home loan then redrawing some of these advance payments could help fund your renovation. Of course, you'll only be able to use whatever the additional amount is, so ensure it's actually worthwhile before redrawing. 

Be careful though; your home loan might not have a redraw option and some loans charge you for each transaction. Furthermore, you're essentially using up your savings and increasing the amount of interest you pay on your loan by redrawing. 

Apply for a construction loan

If you need to do some major work like knocking out a wall or raising a roof, a construction loan might be worth considering. 

Construction loans allow you to access large amounts of money, with the proviso the property will be worth more upon completion of the renovations. 

It's important to consult someone when considering a construction loan, as council approval and a fixed price building contract from a registered builder are required when applying.

One advantage of a construction loan is that your repayments are based on the amount you have drawn down, not on the maximum amount you borrow. However, lenders tend to charge slightly higher interest rates on these loans. 

Home equity loan (line of credit loan) 

Home equity is the difference between the value of your home and the amount you owe on your mortgage. In short, it's the portion you own on your home. Lenders will allow you to use your home equity as security for a deposit so you can borrow money through a home equity loan.

A line of credit loan is a type of home equity loan which allows you to borrow the money, usually a smaller amount, and then repay it. Line of credit loans generally allow you to drawn down up to 80% of the equity in your property.

Top up your existing home loan 

Topping up your home loan could be another solution to financing your home renovation. Topping up your home loan basically means you're increasing your loan amount and is a way to borrow extra money against your home. If you have equity in your home and the ability to make extra repayments, you lender may increase your existing home loan limit so you can pay for your home renovations.

Topping up your mortgages usually costs less than taking out another type of loan because home loans generally have lower interest rates than credit cards or personal loans. However it's important to understand that topping up your home loan does mean you're taking on more debt and that your loan repayments may increase as a result. 

How to choose the best option for your situation

When you're comparing your finance options, it's important to weigh up all the cboosts and pros and cons associated with each option. You also need to have a clear idea of your budget. Depending on the size of the project and available funding, one option may be more suitable than another. For example, let's say you're doing a major renovation that involves structural work. In this situation, a construction loan would be an ideal financing solution compared to say a line of credit loan.

loans.com.au's tips on refinancing to renovate

• Get a valuer out to see how much equity you have in your property. From here you can budget your renovations, and ensure your loan isn't too hefty.
• Check out the values of properties in your area. There's no point shelling out for renovations if your home is going to be well above the average price for the suburb; potential buyers will pass on your house for a cheaper option. 
• Don't borrow more than 80% of your property's value! You'll have to pay Lender's Mortgage Insurance which will guarantee your upfront costs don't outweigh the long term benefits. 
• Know exactly what you want to do in your renovations before going to a lender. It'll help them assist you in what loan is best for you. 

Financing Home Renovation FAQs

Can you use your home loan to renovate? 

Yes you can refinance your existing home loan and increase the amount you owe to the lender to gain the renovation capital needed for your renovation project.

How can you get a home improvement loan without equity? 

If you don't have equity in your home you may want to consider other financing means such as a personal loan or a credit card. You could also take out a construction loan.

What is a renovation loan? 

There is no such thing as a 'renovation loan' but there are ways you can use the equity in your home to finance a renovation. A construction loan is probably the closest thing to a renovation loan as it allows you to construct or make major renovations.

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