How to Choose the Right Renovation Loan for you

Renovating your home can be a great investment, sometimes adding hundreds of thousands of dollars to its value. It can also be an immeasurable investment in your lifestyle and family dynamics.

But embarking on a home renovation project needs to be carefully considered. You need a comprehensive plan to ensure you’ll get the best value for the money you’re spending. Just as you need to put considerable research and planning into how to improve your home, you also need to do your homework on how best to pay for it.

What is a home renovation loan?

Technically, there is no such product as a ‘home renovation loan’. A construction loan is probably the closest there is on the market to a dedicated ‘renovation loan’ product as it allows you to make major changes and renovations to your home.

However, there are many ways you can finance a home renovation, and some may not involve borrowing. Let’s consider all the options:

Savings

Some people spend years putting money aside for renovation projects. This can be an economical way to pay for minor works but, for major projects, it runs the risk of materials and labour costs increasing at a faster rate than savings account balances.

Also, for some renovations, it may be more cost-effective to bite the bullet and embark on a major all-in-one home transformation project rather than splitting the reno into separate projects.

Offset or redraw funds

There is another option that doesn’t involve taking on extra debt. Many home loans feature offset accounts and/or redraw facilities. A redraw facility lets borrowers access additional repayments they have made on their loan, while an offset account reduces the interest charged by offsetting any savings held in the account against the loan’s principal. Making extra repayments or keeping money in an offset account can effectively lower the amount of interest payable.

The advantage of using offset or redraw funds for major purchases is that you are using your own money rather than borrowing more. Accessing these funds to improve your home’s value can be a worthwhile investment.

However, before doing so, it’s important to understand how much extra interest you may pay over time if you redraw repayments or deplete your offset account. Consider whether the potential increase in your home’s value outweighs the long-term interest costs.

Home loans with offset or redraw facilities

Here are some of the most competitive home loans on the market that offer an offset or redraw facility:

Important Information and Comparison Rate Warning

How can I borrow to renovate?

But if you don’t have ready access to excess cash, there are several options to borrow funds for a renovation project.

Home equity loan

Simply put, equity is how much of your home you actually own. A home equity loan allows you to borrow against that equity.

For example, let’s say you purchased your property for $500,000 and, over the years, its value on the market rose to $800,000. Meanwhile, you’ve diligently repaid your home loan and now have just $250,000 to pay back. Your raw equity in the property would now be $550,000 – it’s market value minus the $250,000 you owe on your mortgage.

A home equity loan is a popular way of financing renovations and is a good option for paying for larger scale projects. How much equity you can access will vary between lenders, but many will allow you to borrow up to 80% of the value of your home. Compared to other types of loans, home equity loans have generally lower interest rates and longer repayment periods.

Refinancing your home loan

Refinancing your home loan can also help fund a major renovation. Not only could it provide an opportunity for you to find a more competitive home loan in the market, it can allow you to restructure your loan to meet your financial needs during the renovation process.

Some lenders even advertise cash back refinancing offers that could come in handy if you’re about to embark on a major project. By refinancing your home loan, you might also receive a lower interest rate than if you were to take out, say, a personal loan. It may also offer a longer repayment period.

However, be aware that a lower interest rate isn’t always a money-saver. Stretching your loan over a longer term can end up costing more in the long run, even if the rate is lower.

Cashback home loans

The table below features some of the most competitive home loans with cashback offers currently on the market:

Important Information and Comparison Rate Warning

However, you’ll need to do your homework. Sometimes the costs involved in refinancing your loan can outweigh the benefits of swapping over to another loan product. Be sure to do your sums and speak to your own lender first.

Construction loan

If you don’t have sufficient equity in your property or if you’re planning a significant renovation, a construction loan may be the best option. Construction loans are designed for borrowers building new houses, but they can also be used to finance major renovation projects.

Many lenders who offer construction loans don’t give borrowers the full loan amount directly. Rather, they tend to pay the funds progressively over the duration of the project. This means you’ll only make interest repayments on funds that have been drawn down, not the full amount up front, which can help with cash flow as the project is underway.

Competitive construction loans

Below are some of the most competitive construction loans on the market:

Important Information and Comparison Rate Warning

 

Line of credit home loan

Finally, a line of credit home loan acts like a revolving credit facility where you are approved to borrow up to a certain amount, can repay it over time, and then borrow it again numerous times. Such loans can be useful for paying for major purchases, including home renovations, at a home loan interest rate.

However, these loans generally come with more stringent loan approval requirements than regular home loans. It’s also worth noting, in recent times, line of credit loans have largely been usurped by home loans with offset and redraw facilities.

Other alternatives to a home renovation loan

Credit card

If you’re planning minor renovations or perhaps a do-it-yourself project, a low-interest credit card could be another option. Aside from convenience, credit cards are relatively easy to apply for and can make it easy to purchase materials for a smaller project upfront.

Credit cards allow holders the flexibility to either pay off purchases straight away or over time. But bear in mind, if you need to repay your debt in instalments, ensure you have a low-interest card and do so in a timely manner. Many credit cards carry notoriously high interest rates, which can quickly turn small renovation costs into long-term debt.

Personal loan

Another way to pay for small- to medium-sized renovation projects is via a personal loan. For a minor renovation, you might consider an unsecured personal loan. These usually allow access to up to $30,000. This type of loan, however, generally attracts higher interest rates and shorter terms than home loans.

If you are planning a larger project – such as an extension, deck, or major landscaping – you could consider a secured personal loan. These are generally guaranteed by an asset, such as a newish vehicle or even a boat. Secured personal loans allow you borrow a higher amount, usually around $50,000. They also tend to offer slightly lower interest rates than unsecured loans and can sometimes be paid back over a longer period of time.

Interest rates on personal loans vary widely depending on the product, lender, loans terms, and an applicant’s credit history.

How to compare renovation loans

1. Decide how much money you need

Plan carefully. It pays to have your project plans drawn up and costed so you have the big picture of what expenses you'll be up for. Consider carefully what changes to your home will add maximum value, both to your property as well as in lifestyle terms. Don’t get too carried away with extra touches and flourishes. Costs can blow out rapidly and extras can generally be added later if you’re still keen on them.

Anyone who’s been through a renovation will tell you to allow for unexpected or unforeseen costs. Make sure you add a decent buffer to your costings to be safe.

Before you take on more debt, you should also assess your own financial health. Remember, any plans you've drawn up can wait until you're in a better financial position.

2. Find a loan type that matches your needs

Understanding your financial options is crucial, but that’s only half the battle. You also need to compare these options to see which one best suits your needs and financial situation.

Ultimately, the best choice for you will depend on your specific circumstances. Weigh the pros and cons of each option carefully. Consider factors like the total cost of the renovation, your current financial situation, and your risk tolerance.

If you're feeling overwhelmed by the numbers, don't hesitate to seek help from a professional if you need it. A mortgage broker or financial advisor can be a valuable resource

3. Decide if you can manage the costs and repayments

The average Aussie spends between $22,000 and $45,000 on a kitchen reno, depending on size, materials chosen, and appliances. Yet the renovation bill is not the only one to consider when taking out renovation finance.

You’ll also need to factor in possible interest rate changes, ongoing fees, and any other associated charges. The good news is many loans offer flexible repayment options that can help you budget. The ability to choose between weekly, fortnightly, or monthly payments is common, and it can be worthwhile to make extra repayments when you’re able.

If you want to estimate your potential monthly repayments, mortgage repayment calculators are your friend. They can give you a clear picture of how much you'll owe each month and help you determine the best loan amount for your project without blowing your budget.

4. Are the renovations worth the financial investment?

Finally, before you sign on any dotted lines, researching whether your renovations are likely to pay off in the future can save you headaches down the track. As a rule of thumb, experts say a well-planned renovation can increase your home's value by up to 10%, but only if you hold onto it for at least five years.

Make sure the work you do fits with your longer-term plans for the property. If it’s your family home, it can be harder to separate the lifestyle benefits from the investment perspective. You’ll need to balance the pros and cons of both.

You may want your home to reflect your style, but it can be worthwhile to ensure any work you have in mind has broader appeal too. Think about features that would make your home more attractive to future buyers, like modern kitchens or updated bathrooms.

Not everyone has the magic money tree for a big renovation loan. That's where DIY projects come in. Tackling smaller projects yourself can save a lot of money. But remember, if it involves bashing down walls or adding new structures, it’s probably best to call in a professional. Renovation projects that don’t measure up can be found out during building inspections when you eventually place your home on the market.

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