Financing a Renovation - Loan, Refinance, Redraw or Out of Pocket?

17 July 2020

Properties that need a lot of structural work are sometimes referred to as a “renovator’s dream”. Finding the most suitable way to pay for the work is often a key step in turning your dream into reality.

Depending on your personal situation and the renovation you have in mind, there are several financing options that may be available to you, as well as the potential to avail of grants to help fund the work.

For example, the new government HomeBuilder scheme can provide a grant of $25,000 to eligible renovators. However, it is only available for jobs worth between $150,000 and $750,000, so there will still be a significant cost remaining even for the renovators who do snap up a grant. Here’s an overview of some of the options available when it comes to funding your project.

1. Offset, Redraw or Savings: Pay out of your own pocket

Whether you have savings, hold investments you can cash in, have money built up in your home loan’s offset or redraw facility or have other funds you can access without incurring debt, using your own money to finance renovations may be more straightforward and less financially risky than borrowing money. It also means you would be typically free to sit back and enjoy the fruits of your renovation work without having to worry about paying any extra loans back. 

However, there are a couple of points that could be worth keeping in mind:

  • Offset accounts and redraw facilities are features on home loans. It allows the home owner to put their money into their home loan, or an account linked to it, (over and above home loan repayments) to help reduce the amount of interest payable on that loan. The extra funds can typically be accessed by the home owner when needed, according to the lender’s conditions. If you’re considering accessing money via an offset or redraw facility, you may want to check the effect this could have on your loan in the long run. Money saved in an offset facility reduces the interest you’re liable to pay on top of the loan’s principal, so reducing the amount being offset against your home loan could mean you end up paying more overall and any time shaved off your loan term by the reduction in interest would be lost. 
  • If you’re planning on using savings to finance your renovations, it may be worth checking that after you’ve withdrawn the amount required for your renovations, you’re still left with an ‘emergency fund’, e.g. enough left to deal with any unexpected expenses that could pop up, like an insurance excess or a car service.      

2. Refinance your home loan

For those with enough equity built up in their home, refinancing the loan could be an option. This means you could potentially leverage the equity in your home to top up your loan and help fund the renovation.

Equity is essentially the difference between the value of an asset, such as your home, and how much you still owe on your mortgage. It could be possible to renegotiate your loan with your bank, or find another bank that is offering a better interest rate or conditions, which would allow you access to funds to renovate. 

If you are able to borrow the money needed for the renovation based on your existing home equity, one course of action could be to increase your loan size and place the renovation funds into a 100% offset account (assuming your home loan has an offset facility). This would, generally speaking, prevent you from having to pay any interest on the additional amount until you use it.

Another option could be a line of credit, which is designed to let you access funds as you need them and charges interest on the balance owing on your account.

In some respects, refinancing is a similar commitment and process to taking out a new home loan, so make sure you consider the implications it could have on your wider finances and, if you do decide to refinance, shop around for a competitive product. 

The comparison tables below display some of the fixed rate home loan products on Canstar’s database with links to lenders’ websites, for refinancing owner-occupiers in NSW making principal and interest repayments on a loan of $350,000 with an 80% LVR. Choose between the 1-year fixed, 3-year fixed and 5-year fixed tabs to view results most relevant to you. The results are sorted by ‘current rate’ (lowest to highest), then by company name (alphabetically). Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.

Lowest interest rates for 1-year fixed home loans

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for 3-year fixed home loans

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for 5-year fixed home loans

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

3. Apply for a construction loan

If you’re embarking on a large renovation project such as an extension or a knock down and rebuild, you could consider a construction loan.

A construction loan is typically based on the estimated final (post-renovation) value of your property, which allows you to withdraw whatever amount you need in order to pay the latest renovation-related invoice that has come in. In some cases, these loans can be interest-only for a period of time, in which case they will generally revert to principal and interest at a future date.     

4. Take out a personal loan

A personal loan could be another option for funding your renovations. Personal loans typically allow you to borrow up to around $50,000 (some lenders may have higher limits) and generally come in two forms, either secured or unsecured. Interest rates can vary widely depending on the product, the chosen terms, and your credit history. 

Secured finance will, generally speaking, be cheaper than unsecured finance. Personal loans are no different for the most part, and typically offer a range of options regarding assets you can secure the loan against, such as term deposits, vehicles, and property.

It could be worth bearing in mind that an interest rate which could be considered low for a personal loan product – some of the lowest personal loan interest rates on Canstar’s databases currently hover around 7% p.a. – would still be relatively high when compared against a similarly competitive home loan interest rate, which could be closer to 2.5-3% p.a. With this in mind, you may want to consider the pros and cons of a separate personal loan vs refinancing your home loan. 

5. Other options 

If your renovation is likely to involve smaller, more regular expenses, there are some other types of finance that may be appropriate. For example, you could consider a credit card or overdraft facility. 

Note that these options typically come with higher interest rates and fees than other types of finance so may not be suitable for all renovations, particularly if you think you might not be able to repay the funds quickly. ASIC’s MoneySmart website warns, for example, that while overdrafts may seem handy “high fees can make a dent in your wallet. Explore other credit options before you get an overdraft. There may be products that are cheaper and more suited to your circumstances.”

It could also be worth looking out for grants or interest-free loans that may be available in your state or local area for certain kinds of renovation work. Some states and territories may offer incentives for homeowners who add solar panels to their property, for example.

If you are considering finances and home improvements, these articles may also be of interest:

Our home renovation ideas hub presents a selection of Canstar’s informative and inspirational articles, including:


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