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Home Loan Tips
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July 5, 2021

How Does a Renovation Loan Work?

Tony Xia
How Does a Renovation Loan Work?

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Whether you want that pool for your family before summer or add an extra bathroom to increase the resale value, there are several options to choose from in terms of a renovation loan.

Before deciding which type of renovation loan will work best for you, you’ll need to decide exactly what you want to do and calculate how much it will cost.

Then assess how much money you can contribute yourself or whether you need to borrow the whole amount.

The type of renovation loan you choose will depend on what you want to have done and your existing home loan situation.

So, here’s what you need to know when it comes to choosing a loan for your next renovation.

How Does a Renovation Loan Work?

Planning Your Renovation

When you have ideas, it can be very beneficial to run your ideas by a real estate agent before going ahead to give you some advice.

For example, a spacious grassy backyard will be sought after in an area close to a primary school where your main demographic is families with young children rather than spending a lot of money to create a chic paved deck with manicured flower beds could be a waste of time and money if there is no market for that.

Once you have decided what you want to renovate, you can start calculating the costs. Remember to include material, labour and permit costs.

There’ll always be unexpected expenses to account for over and above, so add a buffer as well.

Look at your savings and income to determine how much financing you will need and what you can afford in terms of repayments. Do you need total funding upfront? Or will it be more viable to receive money in stages during the renovation process?

Why Do Major Renovations Call for a Construction Loan?

A construction loan might be the way to go if you’re considering doing some major renovation on your home (for structural renovations) or constructing a new home. In fact, it’s probably one of the best types of loans for this type of project because its structure is well suited.

A construction loan works differently from your average home loan because the payments are made according to a progressive drawdown structure.

This means that rather than receiving one big lump sum to work through during the renovation process, you get instalments of the loan at different stages of construction.

For example, the first payment will go towards laying the foundation of your property. It can cover the levelling of the ground, as well as the plumbing and waterproofing of your foundation.

The next payment will be to build the frame of your property, including partial brickwork, the roofing, trusses and windows.

And it will continue like that until the major building and renovations are complete. And then, the lender usually releases any last payments to cover the cost for builders and equipment and any finishing touches such as plumbing, electricity, and overall cleaning.

So, construction loans are a good option if you’re building your home from scratch or completing major renovations and need a large sum of money.

How Does a Renovation Loan Work?

Is a Personal Loan Better Suited for Smaller Renovations?

If you’re thinking of doing a few minor renovations like painting your apartment or replacing some old flooring, getting a personal loan could be the way to go.

Different lenders have different maximum personal loan amounts available to borrowers, but you should consider a personal loan if you borrow less than $50,000.

A great thing about personal loans is that it has a few different features to choose from, to tailor the loan to your personal circumstances.

Personal loans can be:

  • secured loans or an unsecured personal loan (against your assets);
  • fixed or variable rate loans (you can make additional payments with variable rate loans to pay off the loan sooner, loans with fixed interest rates will charge early repayment fees); and
  • higher in interest rates than other renovation loan options.

Have You Considered Topping Up Your Existing Home Loan?

Another option, depending on your financial situation is just to increase the amount of home loan you already have.

Instead of being on top of different loans and interest rates and features, you can just increase your monthly loan repayments to cover your new loan and instead focus your energy on the actual construction.

How Can You Make Use of Your Equity by Refinancing?

This loan is supplementary to your home loan, and you’re essentially using the equity from your current property to fund your construction work.

You can only apply to refinance your home loan once you have paid off at least 20% of your loan balance.

The more you have paid off, the larger your equity will be, so this could be a good option if you need a large sum of money for your home renovation and have paid off most of the mortgage on your existing property.

How Does a Renovation Loan Work?

Can You Use Money From Your Offset Account or Redraw Facility?

Like drawing equity from your existing property, you can use extra funds in your offset account or redraw the facility to pay for the renovations.

If you deposited money into either of these accounts over the years as a form of savings, an excellent way to spend those savings is on home renovations.

But, drawing money from your redraw facility or offset account could end up delaying how quickly you pay off your existing loan. So, make sure to speak to your mortgage broker to ensure that this is a feasible option for your renovations or construction.

Key Takeaways

If you need to borrow money from the bank to fund your home renovation project, you can apply for a home renovation loan in the form of a:

  • construction loan,
  • personal secured or unsecured loan, or
  • top up your current home loan.


A loan for construction is ideal if you need a large loan amount, while a personal loan is good for minor renovations, and topping up your home loan could swing either way.

On the other hand, if you have paid off enough money on your property, you could refinance your home loan as a form of renovation loan and use your existing home equity. The more money you have paid, the more equity you will have access to.

The final option is to use any accumulated savings in your offset account or redraw facility. The benefit of this is that you wouldn’t need to take out a renovation loan at all. However, proper planning for this strategy is crucial.

These are all different ways of doing the same thing: funding your renovation costs. While each of these home renovation loans will fulfil this task, asking the advice of a professional can help you reach your personal objectives quicker, easier, and at a lower cost.

A mortgage broker can use their expert knowledge and skills to assess your financial situation and provide you with a strategy that best suits your needs and wants. They can also negotiate with leading lenders to distinguish the best deal to suit your budget.

At The Mortgage Agency, we have access to many lenders that provide us with updates on market conditions and any policy changes. Our up-to-date knowledge means we know the best ways to negotiate a better arrangement for your specific needs as new opportunities arise.

So, for access to a wide range of home loan options for your next renovation, contact the Mortgage Agency today.

Disclaimer:

Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.

About Tony Xia

Having worked in the customer service and finance industry since 2011, our Director Tony Xia and his team’s highest priority is to cultivate a long-lasting relationship with clients based on trust and respect at The Mortgage Agency.

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