How to finance your home renovation

March 22, 2021

Over the last 12 months we’ve spent more time at home than most of us wanted to. For a huge chunk of the population, home has also become our place of work. As a result, we’re as keen as anything to upgrade the space around us – and there are loads of different ways we can fund our renovation plans.

The insights team at Finder recently ran a survey of 1,004 Australian adults and found that almost half (47%) of wannabe renovators could fund a house renovation with savings.

That leaves around 53% of Australian households relying on some form of finance, in order to follow through with their renovation plans.

If this represents you and you’re keen to transform your kitchen into one of the Hampton’s-style sanctuaries you’ve been pinning on Pinterest – or perhaps refresh the bathrooms, living areas or outdoor zones – what are your finance options?

Get a personal loan

Finder research shows that 17% of Australians would get a personal loan to fast-track their renovation plans. Personal loans are usually capped at around $100,000 and you can finance a substantial upgrade with that kind of cash – but interest rates on personal loans are very high, so you should think really carefully before going down this path.

The best way to look at this is as if you’re adding a fairly hefty premium to your renovation cost. Let’s say you have a renovation budget of $30,000 and you get an unsecured personal loan with an interest rate of 12%, payable over 3 years.

Our personal loan calculator shows the interest payable over the loan’s term is $5,871 in total. This essentially adds a premium of around 19.6% to the cost of your renovation. Is there a cheaper way to do it? There sure is…

Add it to your existing mortgage

With interest rates the lowest they’ve been in decades, dipping into your equity or refinancing your loan is a far cheaper way to fund your renovation than getting a personal loan.

Perhaps this is why around 28% of Aussies say they would add reno costs to their existing mortgage or refinance, if possible. You could refinance to a new lender or ask your existing bank if you can top up your loan.

One potential snag here relates to how much equity you have available. If you have a home worth $800,000 and a mortgage worth $700,000, then it’s going to be challenging convincing the bank to let you dip into those funds, as it leaves you with less than 20% equity in the loan.

You could potentially get around this by asking your lender to value the home based on its future value, post-renovation. This is something I’ve done successfully in the past, when I borrowed $30,000 to build a major deck extension with an outdoor patio.

My bank sent out a valuer, who agreed that the renovation would increase the value of the home by at least the amount we were spending on the renovation. As a result, we were able to borrow the money we needed without paying lenders mortgage insurance. This is a great option if your renovation plans involve big-ticket items like kitchens, bathrooms or structural changes, such as adding an extra bedroom – these are the types of renos that are likely to increase your home’s value.

Getting a loan is not the only way you can fund your reno project, of course. Almost 1 in 20 respondents (4%) to our survey said they would borrow the cash from family or friends, while the same number (4%) said they would put the cost of a renovation on a credit card. This is possibly the most expensive option of all – with credit card interest rates topping 20%, you’d want to have a plan to repay that debt as quickly as possible!

Do renovations always add value to your home?

Overall, the majority of home renovations are an investment and in most cases they can be value-adding.

But this isn’t always the case: structural changes or “hidden” work that is required for maintenance, rather than aesthetic appeal, may not move the needle on your home’s valuation. Plumbing work, electrical repairs, removing nuisance tree roots or attending to retaining walls are all types of (potentially expensive) renovations that can be necessary, but won’t always add value to the property.

So before you dive into your renovation, make sure you create a thorough budget and to-do list, then get multiple quotes to minimise the chances of surprise costs along the way. With the right planning and a clear budget, you could be enjoying brunch on your brand new balcony or relaxing in your new spa sanctuary bathroom before the year is out.

Sarah Megginson
Sarah Megginson is senior editor of home loans for Finder. She was previously managing editor of Australian Broker magazine, Your Investment Property magazine and online home loan comparison site, Your Mortgage. Sarah has worked as a finance and property journalist for more than 15 years.
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