What is a home renovation loan?
A home renovation loan is any credit product used to pay for repairs or improvements to your property. There are specialist construction loans you could consider, but plenty of alternative options are also out there.
Home renovation loan options
Some of the most prominent ways to finance home upgrades are:
- Refinancing your existing home loan
- Using the money in your offset account or redraw
- Specialised construction loans
- Personal loans
Here’s what to know about each option:
Top up or refinance your home loan
Refinancing or ‘topping up’ your existing home loan can be a simple way to finance your renovations. A top up lets you borrow extra money against the equity you’ve built up. You stay with the same lender and product, and possibly the same interest rate depending on your circumstances. Refinancing to a different lender could be worthwhile if you’re getting a lower rate, but you should also bear in mind the costs of refinancing.
Benefits
- Topping up or refinancing may mean paying a lower rate than taking out a new personal loan.
- It might also be easier than having to find a new loan.
Drawbacks
- If you don’t also increase your repayments, the new sum you’ve borrowed could accrue interest for years, making the overall loan significantly more expensive.
- The home renovation loan will be secured against your property, meaning you could lose your home if you can’t pay it back.
Use the money in your offset or redraw
If you’ve managed to build a decent balance in your offset account or redraw facility, you could use this money to pay for your renovations. This is functionally very similar to refinancing or topping up: you’re effectively increasing the amount you owe (and accrue interest on) by whatever you withdraw.
Benefits
- Using the money in your offset or redraw means you don’t have to pay the administrative costs of topping up or refinancing.
- All you need to do is make a redraw request, and if you have an offset account you don’t even have to do that.
Drawbacks
- Since you’re still extending your loan, it’s still important to increase the amount you’re repaying so you aren’t potentially accruing extra interest for decades.
- You need to have enough in your redraw/offset in the first place!
Get a construction loan
Construction loans are a special product designed for people building a home or doing major renovations. They are structured differently, usually with a ‘progressive drawdown’ where you receive the loan in instalments at different points in the construction process. Construction loans are also often interest-only while building is taking place.
Benefits
- ‘Progressive drawdown’ means you only pay interest on what you’re actually spending rather than the total you’re borrowing, while most other options you’ll have to borrow it all up front. This could be particularly helpful if the renovations are going to take a long time.
- Construction loans can be a lot more flexible. Say you’re approved for a $100,000 loan, but the build is less expensive than you’re expecting. With a normal loan you’ll be paying interest on the excess amount until you pay it back, whereas with a construction alone you might not draw it down at all.
Drawbacks
- Rates on construction loans can be higher than conventional home loans.
- Going interest-only for a period can mean paying more interest in total.
- Construction loans may not be available for DIY renovations.
A personal loan
Finally, you could use a regular unsecured personal loan for your renovations.
Benefits
- The loan won’t be secured against your property, so you aren’t risking losing your home if you can’t pay back your home renovation loan.
- If you’re adding environmentally friendly features to your property like roof insulation or solar panels, you might qualify for a lower rate green personal loan.
Drawbacks
- Personal loan rates are generally significantly higher than normal home loan rates
Is renovating your home worth it?
Ultimately whether your home renovation is worth it is a question only you can answer. The value you get from your repairs or upgrades might be intangible - adding a pool for your children, for example, or improving your home’s accessibility as you age.
Speaking strictly financially though, the question is whether you’re increasing the property value by more than the cost of the renovations. In 2023, Home renovation expert Cherie Barber gave Canstar her top five renovations to add value:
- Kitchen makeover: “It’s important that the kitchen suits the house,” Ms Barber said. “Consistent design adds value.”
- Bathroom renovation: One of Ms Barber’s key bathroom tips is to add storage. “Storage can add big value, and can be achieved through a bigger vanity as well as concealed storage in walls.”
- An extra bedroom: “Oversized lounge rooms that can be reduced slightly in size, formal dining rooms that never get used, a large laundry, and roof space all have the potential to create an extra bedroom.”
- Add a garage: “If you have room to the side or front of the home and your budget allows, it’s worth adding a garage especially in an area where garages are prevalent.”
- Spruce up the facade: “First impressions often set an expectation as to the rest of a home.”
Ms Barber also pointed to a few common renovations that are less likely to add value (although the value these bring to you may still be worth it!):
- Swimming pools: “For homes located near a beach or public pools, the uptick in value is less certain.”
- Smart home technology: “The technology can quickly become outdated, and it can be frustrating from a user perspective.”
- Home theatres: As with smart homes, the tech required for home cinemas is often expensive, and can date quickly.
