How to choose a home renovation loan

By Gerv Tacadena
An artist's rendering of a planned kitchen renovation

Picture this: While having your morning coffee one sunny day, you watch a young family moving into the newly-built house across the street. As you notice the house's modern touches and minimalist aesthetic, you begin thinking about your own home, thinking of the last time you had your walls repainted. You also remember thinking about modernizing your kitchen, and maybe extending the bedroom. And then you wonder about how to make these plans a reality.

A typical homeowner can spend months, or even a few years, saving for renovations. While this is in many ways the best option, it definitely takes the longest amount of time to come to fruition, and most of the time cash savings may only cover a small renovation project, say a new wallpaper for your bedroom or a new kitchen countertop.

For a major house makeover, it can be wise to apply for a renovation loan. Whether you just want to restore your house or transform it into something you have always dreamed of, there are options in the market that would fit your financial needs. Here's what you can expect to look for.

A home equity loan

One of the most common methods of borrowing for renovations, a home equity loan is a good option for financing big scale projects, as some banks will allow you to borrow up to 80% of the value of your home.

Compared to other types of loans, home equity loans usually have lower interest rates. However, because they are often large loans, you will bear increased repayments for a longer period of time.

Refinance your mortgage

If you are the type of homeowner who regularly reviews your home loan every few years, refinancing might be a good way to fund your renovation project. You can refinance your mortgage to find a more competitive deal in the market: whether it has a lower interest rate or features that better cater to your financial needs.

Perhaps the biggest hurdle, if you go this route, is the number of fees you have to settle when you refinance. Check out our guide to the process to learn more about refinancing.

Swipe your credit card

For do-it-yourself renovations, opting to use a low-interest credit card can be the way to go.

Aside from the convenience, credit cards are easy to apply for, and can make it easy for you to purchase the materials you need for your DIY project.

As anyone with a credit card knows, you have to make sure to pay your balance off in full and in a timely manner to avoid penalties and interests.

Consider a personal loan

You can also look for lending institutions which have a range of personal home loan offerings. This type of loan is a suitable and cost-effective way to fund minor to big-time renovations. For smaller projects, you can consider an unsecured personal loan, usually up to $30,000. This type of loan, however, has higher interest rates and has a term of up to seven years.

If you are planning on a larger project – building an extra room or to remodelling your backyard – you should look at a secured personal loan, which will allow you to borrow a higher amount for slightly lower interest rates over a longer period of time.

Before choosing this option, just take note of all the dues personal loan entails, from application to annual fees. Also, remember to choose the best deal amongst all the banks that would suit your budget needs.

Take a construction loan

If you do not have sufficient equity in your property, applying for a construction loan is the best option. These work similarly to home equity loans, except for the fact that the amount is based on the final value of your property post-renovation.

Most lenders offering this type of loan do not give borrowers the full loan amount directly, but rather dole it out in tranches over a certain period of time.

Consider an overdraft

For long-term renovations, it would be practical to apply for a line of credit or an overdraft, which will be attached to an account or a revolving credit line. The greatest advantage of applying for a line of credit is that interest is only charged on the balance you owed and not on the total loan amount. Also, you can re-borrow the unused funds without reapplying as you settle your balance.

However, this has a larger interest rate compared to the standard variable cash rate. It also imposes fees for using the credit facility.

Before you apply...

Plan carefully. It pays to have a definite and organized plan for your project. Make sure to assess your financial health before taking on another loan.

Additionally, when planning renovations, be sure to allow for a sufficient buffer in case you need additional funds. List and exhaust all the projected expenses and make sure not to underestimate costs. Renovations are not inexpensive, and can definitely leave you with empty pockets if you do not carefully plan your budget.

It would also be good to be sure to investigate the extra touches and details in your project which can maximise the value increase to your property once the renovations are complete.