The short answer
For smaller cosmetic jobs, borrowers often top up their existing loan or refinance to a new lender and draw out equity. For larger or structural work, a construction loan that pays the builder in stages may be needed. Either way, the lender looks at your equity, your capacity to repay and what the money is for.
Ways to fund a renovation with your home loan
- Top up your current loan: borrow more with your existing lender, if it agrees. See the pros and cons of topping up.
- Refinance and release equity: move to a new lender and borrow extra at the same time. This is worth comparing if your current loan is no longer competitive.
- A construction loan: for structural or major work, some lenders release funds in stages as the build progresses, against a building contract.
What lenders look at
- Your equity: the property’s value less what you owe. Many lenders cap borrowing at 80% of the value without LMI. Try the equity calculator.
- Your capacity to repay the larger loan, based on your income and expenses. The borrowing power calculator gives an estimate.
- The purpose: quotes or a building contract for larger amounts.
- A valuation: some lenders can value on an “as if complete” basis for construction work, under their own policy.
Costs to weigh up
- Discharge, application and valuation fees if you switch lenders.
- Lenders mortgage insurance if your loan goes above 80% of the value. See what LMI is.
- Interest on the extra amount for the life of the loan, unless you pay it down faster.
- A buffer for cost blowouts, which can happen with building work.
General information only. Lender policies on renovation and construction lending differ, so the options depend on your situation and the lender.
Mortgage broker at My Finance Consultants. Daniel compares home loan options from a panel of 40+ lenders for refinancers, investors and home buyers, by phone or video, evenings included. About Daniel
General information only. It doesn’t consider your objectives, financial situation or needs, and it isn’t tax, legal or financial product advice. Lending criteria, fees and charges apply.