Home loan for renovations: the four ways to pay, and the line that decides which

Can you use a home loan to renovate?

Yes, you can usually use a home loan to renovate, often from the loan you already have. The money can come from what you've paid ahead on the loan, from increasing the loan against your home's equity, from a construction-style loan that pays the builder in stages, or from a separate personal loan.

What decides your route isn't the word "renovation". It's what the work is, what it costs, and which value of the home the lender has to rely on to lend you the money. The next parts set those out in the order a lender looks at them.

The four ways to fund a renovation

The four ways to fund a renovation suit different jobs, and they don't cost the same. Here they are side by side.

Many owners want the simplest route that covers the whole job. The catch is that the simplest one can stop short of what the work costs, and that's when the choice gets made for you.

Can I use redraw or my offset account to renovate?

Yes, you can usually use redraw or an offset account to renovate, because it's your own money. Redraw is extra you've paid into the loan that you can take back out; an offset account is savings held against the loan to cut the interest. Spending either usually needs nothing new to apply for.

The cost is quieter. Money in redraw or offset is often the buffer you'd use if your income dropped or a job ran over. Spend it all on the renovation and the loan's interest goes back up, with nothing left in reserve.

One limit worth knowing: on a construction-style loan, redraw may not be there during the build. Firstmac's policy, for example, says split options and redraws aren't available on its construction loans [4].

Can I top up my home loan to renovate?

Yes, you can usually top up your home loan to renovate, if there's enough equity and your income covers the bigger loan. A top-up increases your loan, and the extra is paid to you to spend on the work. You can ask your own lender, or refinance to a new one that lends the larger amount; see refinancing your home loan.

Lenders want to know what the money is for. Firstmac's published policy, for example, treats any money paid to you directly as cash out, whatever it's for, and wants the purpose clearly identified. Up to $100,000, with the loan at or under 80% of the value, it asks for no further evidence where clear details are given. Above $100,000, it wants documents such as quotes or invoices [5].

A top-up is usually lent against what your home is worth today [1]. That's fine for work you can pay for out of today's equity, and it's the reason a big job can fall short, which part 11 explains.

Cosmetic or structural: the line that decides the loan

Cosmetic work changes how the home looks; structural work changes how it stands. That one line decides more about your renovation loan than the price of the job.

Cosmetic work can usually be paid for from redraw, offset or a top-up. Structural work usually brings council approval, a licensed builder, a fixed-price contract and payments in stages, and many lenders will only fund it that way [1][2][3].

Where exactly a lender draws the line is its own call, and it can differ from what a builder calls structural. Ask before you sign with a builder, not after.

When does a renovation become a construction loan?

A renovation becomes a construction loan when the lender relies on the home's finished value to lend. One lender's credit policy puts it in one line: home improvement or renovation loans where it relies on the on-completion value must be assessed as a construction loan [1].

So the trigger isn't the size of the job. A modest extension that needs the finished value to stack up can be a construction loan; a large cosmetic job paid for out of today's equity may not be.

What this means for you: before you ask "how much can I borrow for the renovation?", ask "does the lender need the finished value to get there?" If it does, you're looking at a construction-style loan, with its contract, stages and inspections, and it pays to plan for that from the start.

At that same lender, a construction loan is capped at 80% of the value [2].

How a construction-style renovation loan works

A construction-style renovation loan pays the builder in stages, as each part of the work is done, instead of paying you a lump sum. Before each payment, the lender usually sends a valuer to check the stage is finished. Firstmac's construction loans, for example, have a progress valuation at each stage [3].

Your own money usually goes in first. At Firstmac, any contribution of yours is paid from your own funds before a progress payment is drawn from the loan [3].

There can be a clock, too. Firstmac's construction period is 12 months from settlement, and if the work isn't finished by then, it adds 0.50% a year to the construction rate [3].

For the full mechanics of stages, contracts and builders, see construction loans.

Can I renovate without a construction loan?

Sometimes you can renovate without a construction loan, and one lender's policy sets out exactly when. Where the loan is 80% or less of the home's value as it stands today, and the loan isn't more than the land value, that lender may approve a standard loan instead: no building contract, no council plans, no progress payments, and the lender doesn't control when the money is released [1].

It has conditions. Work that has already started in any form rules it out, the lender wants confirmation that a licensed builder is doing any structural work, and it wants the expected cost of the work to show you can finish it [1].

What this means for you: if your equity today covers the job, there may be a simpler path than a construction loan, even for structural work. It isn't offered everywhere, and the conditions are strict, so it's a question to settle before you choose the lender.

Can a renovation loan use the value after the work is done?

A renovation loan can use the value after the work is done, but usually only as a construction-style loan. A top-up is usually lent against today's value [1]. A construction-style loan can be assessed on the expected value once the work is finished, from a valuation of the plans and the contract [1].

Here's why that matters, as an illustration. A home is worth $700,000 today, with $480,000 owing, and the owners want to spend $200,000 on an extension that a valuer might put at $900,000 once it's done [10]:

Same home, same job: on today's value the loan covers $80,000 of the job before LMI, and on the finished value the 80% line sits high enough to fit all of it, before the cost-to-complete test below. That's the difference the route makes.

The finished value isn't a free pass. For a construction loan, one lender measures the loan against the lower of the finished value or the cost to complete [1], and the valuer, not the builder or the owner, decides what the home will be worth.

How much equity can I use to renovate?

The equity you can use to renovate is usually 80% of your home's value, less what you owe. Equity is your home's value less your loan, but you can't borrow all of it: above 80% of the value, lenders mortgage insurance (LMI) usually applies [6].

LVR, the loan as a share of the property's value, is the number lenders use. An illustration: a home worth $800,000 with $560,000 owing is at 70%. Eighty per cent of $800,000 is $640,000, so about $80,000 can be used before LMI [10].

The valuation decides it. If the lender's valuer puts the home at less than you expected, the usable equity shrinks by 80 cents for every dollar the value falls. More on how equity is worked out is on using equity.

Will renovating push my loan over 80%, and what would LMI cost?

Renovating can push your loan over 80% of your home's value, and that's the point where lenders mortgage insurance usually starts. LMI is insurance the lender takes out when you borrow more than 80% of the value, and you pay for it.

Here's what different top-ups do on the same $800,000 home with $560,000 owing, from one insurer's published rate card at its standard rates; the card adds no loading for a refinance [6]. These are illustrations from one card, not quotes [10].

What this means for you: a top-up of $80,000 stays at the line with no LMI, while $100,000 brings about $7,458 of LMI, charged on the whole loan, not just the extra. If you're close to the line, trimming the scope, paying part from savings, or staging the work can keep you under it. The premium you get depends on the insurer and lender, and on the loan.

How much can I borrow for a renovation?

How much you can borrow for a renovation comes down to two tests: the equity in the home, and whether your income covers the bigger loan. Equity sets the ceiling; income decides whether you reach it.

A lender has to assess whether the larger loan is "not unsuitable" for you, and must not lend if it is unsuitable [8]. Banks also check you could still make the repayments if rates were 3 percentage points higher, the buffer APRA has set [9].

So a home with plenty of equity can still fall short if the income doesn't stretch to the new repayments, and two lenders can give different answers on the same pay. See how much can I borrow.

Do I need council approval before the lender will lend?

If the work needs council approval, the lender will usually want to see it, or the plans submitted for it, before it lends. One lender's current policy asks for council-approved plans before formal approval, or the plans submitted [2]. Firstmac wants council-approved plans before the first payment on a construction loan [4].

Approval takes time, so build it into your plan. A loan approved before council approves the work may not be able to pay out until it does, and a builder's start date doesn't move the council.

Can I do the renovation work myself?

You can usually do cosmetic work yourself and pay for it from redraw, offset or a top-up, because the lender is lending against the home as it stands. Painting, flooring and fitting out are often done this way.

Structural work is different. The lender policies Money Brain has read refuse owner-builders on construction loans: Firstmac says construction may only be done by a licensed or registered builder, and owner-builders aren't acceptable [3], and another lender lists loans to owner-builders as an unacceptable purpose [2]. Even that lender's simpler standard-loan route wants confirmation that a licensed builder is doing any structural work [1].

Should I start the work before the loan is approved?

It's usually better not to start the work before the loan is approved, because starting early can close doors. At one lender, a home where construction has already begun in any form can't use its simpler standard-loan route [1], and a lender lending on the finished value wants the contract signed, and the plans approved or submitted, before formal approval [2].

Get the loan approved, the contract signed and any council approval in hand, then let the builder start. If a builder wants a deposit to hold your spot, we're happy to check it against the loan before you pay.

What if the renovation costs more than planned?

If the renovation costs more than planned, the extra usually comes from you, not the loan. Leave a buffer above the quoted price, and know before you start how you'd pay for an overrun.

On a construction-style loan, an overrun can stop the job halfway. Firstmac, for example, keeps back enough of the loan to finish the work, as its own valuer estimates the cost to complete, whatever the payment schedule or contract says [4].

What this means for you: the buffer is part of the plan, not an extra. A renovation funded right to the last dollar has nowhere to go when the builder finds rot behind a wall.

What a renovation adds to the value, and what it doesn't

Not every dollar spent on a renovation comes back in value. Work that fixes a problem a buyer or valuer would mark down, or brings a tired home up to the standard of the street, tends to count. Work beyond what the street supports often doesn't.

That matters to the loan in two places: when the lender values the finished home (part 11), and later if you're counting on the higher value to refinance or sell. It's general information, not advice on what to spend; a valuer's view of your street is worth having before you commit.

Bought with the 5% Deposit Scheme? You can't top up yet

If you bought with the 5% Deposit Scheme, you can't top up the loan to renovate while the government's guarantee is in place: the loan can't be increased [7]. Rate changes and product switches with the same lender are fine [7].

The guarantee ends by itself once you owe 80% of the value, measured on your scheduled repayments; extra repayments you can redraw don't count toward getting there [7]. After that, a top-up can be considered on the lender's usual terms.

You can refinance to another lender on the scheme's panel and keep the guarantee, but only without increasing the loan or extending the term [7]. More is on the First Home Guarantee page.

Personal loan or home loan for a renovation?

A personal loan or a home loan can both pay for a renovation; the difference is mostly the rate and the term. A personal loan doesn't touch your home loan, but it's usually at a higher rate over a shorter term. A top-up is usually at the home loan rate, but spread over the loan's remaining years.

The longer term is the cost people miss. Here's $60,000 at the same 6.0% a year, an illustrative rate, repaid two ways [10]:

Same money, same rate: spreading it over 30 years makes each month easier and costs more than seven times the interest. If you top up, paying the renovation part off faster, as if it were a five-year loan, keeps the lower rate without the long tail.

Building a granny flat, or knocking down and rebuilding?

A granny flat or a knock-down rebuild is a different loan question from a renovation. A full knock-down and rebuild is a construction loan; see construction loans. A granny flat has its own page, because whether a lender counts its rent is a question of its own; see granny flat finance.

What does a broker cost you?

How a broker is paid, and the rule Money Brain holds against it, is set out in full on its own page: what a mortgage broker costs.

Your first move

You've read how the routes work. Now there's one question left: does your job need the finished value, or does today's equity cover it? That depends on the work, the quotes, the valuation and your income, and it's what Money Brain works out before anything goes to a lender.

When you're ready, the closing section below is the simplest way to start.