If you’re unsure whether a refinance for renovation is a good idea or not, the short answer is yes. You should know that it can be a practical way to access funds that you plan to reinvest directly into improving your home. By using the equity you’ve built in your property, you may be able to finance upgrades or renovations that enhance the home’s comfort, functionality or value without relying entirely on your savings.
However, accessing the funds is only one part of the decision. It is also important to understand how refinancing could change your loan balance, repayments and overall borrowing costs. You should consider the costs of switching, how much you realistically need for the project and whether the new loan structure supports your future plans.
Before making a decision, these seven considerations can help you look beyond the renovation budget and assess how refinancing could fit into your broader financial position.
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Should You Refinance for Renovation Before Starting Your Project?
Refinancing involves replacing your existing mortgage with a new loan, either with your current lender or a different one. When renovations are involved, you may also apply to increase the amount borrowed and use the additional funds to help pay for the project.
Homeowners may consider home loan refinancing when their existing mortgage no longer suits their needs or when they want to review their loan while arranging funds for improvements. Depending on the circumstances, refinancing may provide an opportunity to reassess the loan’s interest rate, features and repayment structure at the same time.
According to Moneysmart, there can be a difference of more than 2% between variable home loan rates available on the market. This is one reason it can be worthwhile to review your existing mortgage rather than focusing only on how you will fund the renovation.
What Does It Mean to Refinance for Renovation?
For eligible homeowners, refinancing can provide access to some of the value they have built up in their property. Your home equity is generally the difference between your property’s current value and the amount you still owe on it. Usable equity refers to the portion a lender may allow you to borrow against, subject to its lending criteria.
Having equity does not automatically mean you can borrow the amount you want. A lender will assess factors such as:
- your income and regular expenses
- existing debts and financial commitments
- the property’s value
- your proposed loan-to-value ratio (LVR)
- your ability to service the increased loan
A property valuation may also be required before the lender determines how much additional borrowing it is prepared to approve.
7 Things to Consider Before Refinancing for Renovation
Choosing to refinance for renovation can do more than provide funds for your project. It can also give you an opportunity to review your existing mortgage and consider whether its structure still suits your needs. Before proceeding, look at these seven factors as part of the bigger financial picture.
1. How Much Usable Equity You Have
One potential advantage of refinancing is being able to access some of the home equity you have built up. As covered above, not all of your equity is accessible — lenders will only let you borrow against the usable portion.
The amount available will depend on the lender’s criteria and its valuation of your property. Your resulting loan-to-value ratio (LVR) also matters. A higher LVR can affect lending conditions and may result in lenders mortgage insurance (LMI) being required.
Knowing your usable equity early can help you set a more realistic renovation budget and determine how much additional borrowing you may need.
2. The Full Cost of Switching Your Home Loan
A lower interest rate can make home loan refinancing appealing, but the rate is only part of the calculation. Understanding the costs of switching helps you assess the overall value of the new loan.
Depending on your circumstances, costs may include:
- discharge fees
- application or establishment fees
- valuation fees
- government charges
- break costs for some fixed-rate loans
ASIC’s Moneysmart recommends checking the fees involved in switching and working out how long it will take to recover those costs. Comparing the interest rate, fees, loan features and total repayment costs gives you a more complete picture.
3. How Much the Renovation Will Really Cost
Before deciding how much to borrow, build your budget around realistic quotes rather than an initial estimate. Renovation costs can change as work progresses, so allowing room for unexpected expenses can reduce the chance of running short of funds.
Extra costs could arise from:
- changes in material prices
- unforeseen structural problems
- variations to the project scope
- additional labour
- council approvals or other requirements
If you plan to refinance for renovation, consider including an appropriate contingency in your project budget. Accurate quotes and a clear scope of work can also make it easier to determine how much funding you actually need rather than borrowing based on guesswork.
4. How the Additional Borrowing Will Affect Your Repayments
Adding renovation costs to your mortgage can spread the additional borrowing over an extended period. This may make repayments more manageable from month to month, depending on the loan structure, interest rate and amount borrowed.
However, stretching out the loan term can also mean paying interest on the renovation costs for many more years. When you refinance for renovation, compare both the new repayments and the total interest you could pay over the life of the loan.
Where your circumstances allow, structuring the additional borrowing so it can be repaid sooner may help reduce long-term interest costs.
5. Whether the Renovation Supports Your Property Goals
A successful renovation does not always need to deliver a dollar-for-dollar increase in property value. A new kitchen, extra bedroom or improved outdoor area could make your home more suitable for your family even if the financial return is difficult to quantify.
Before deciding how much to spend, consider:
- how long you intend to live in the property
- whether the work addresses genuine household needs
- comparable properties in your area
- features local buyers typically value
- whether the project could result in overcapitalisation
Separating lifestyle value from potential financial value can help you set a renovation budget that reflects what you actually want from the property.
6. Which Loan Structure Suits the Renovation
The appropriate funding structure can depend on the size, cost and type of work involved. A cosmetic update may have different lending requirements from a major extension or structural renovation.
Depending on your circumstances, your options could include refinancing, increasing an existing loan, or taking out a dedicated renovation or construction-style loan.
For substantial building work, lenders may require additional documentation such as plans, building contracts and detailed costings. Funds may also be released through progress payments as particular stages are completed. Understanding these requirements before work begins can help you choose a structure that suits the project and its payment schedule.
7. How Refinancing Fits With Your Longer-Term Financial Plans
Renovation borrowing should also be considered alongside your other financial goals. Increasing your mortgage balance can affect your cash flow and may influence future borrowing capacity.
Before choosing your renovation finance, think about plans such as:
- purchasing an investment property
- upgrading to another home later
- continuing to build your savings
- maintaining an emergency buffer
- managing possible changes to household income or expenses
Refinancing can work well when the additional borrowing remains manageable and the loan structure supports your plans beyond the renovation itself. Looking several years ahead can help ensure the improvements you make today fit comfortably within your broader financial position.
What If You Don’t Have Enough Equity for Your Renovation?
Having limited usable equity does not necessarily mean you need to put your renovation plans on hold. For larger projects, particularly structural renovations or extensions, a construction loan may be another option worth exploring.
Unlike a standard mortgage that generally provides funds as a lump sum, construction lending can release money progressively as different stages of the work are completed. You generally pay interest only on the amount drawn down at each stage rather than the full approved amount from the beginning.
Eligibility and lending requirements will depend on the project and lender. Larger renovations may require detailed plans, a building contract, cost estimates and a progress payment schedule.
Questions to Ask Before You Refinance
Before you refinance for renovation, look beyond the amount you can borrow. A few practical questions can help you understand how the new loan could affect your finances during and after the project.
- How much will the renovation realistically cost?
- How much usable equity can I access?
- What will my new loan balance and repayments be?
- What fees or switching costs will apply?
- Does the new loan offer useful features such as an offset account or redraw facility?
- How long will it take to repay the additional borrowing?
- Could a larger mortgage affect my other financial plans?
- Do I have a contingency if renovation costs increase?
Looking at these questions together can help you compare the immediate funding benefits with the longer-term cost and structure of your new mortgage.
Choosing the Right Way to Fund Your Renovation
The $10,000 grant is not the only form of government support that may be available when buying your first home. There are separate NSW and Australian Government schemes that can help eligible buyers reduce certain upfront costs or purchase with a smaller deposit.
These benefits are not additional first home buyers grants. Each scheme works differently and has its own eligibility requirements.
First Home Buyers Assistance Scheme
Deciding whether to refinance for renovation comes down to more than accessing funds for the work. A well-structured approach should account for your renovation budget, new repayments, borrowing costs and longer-term plans. Taking the time to compare your renovation finance options can help you understand how the additional borrowing will fit into your overall financial position.
The experienced team of mortgage brokers at ZEP Finance can provide expert recommendations tailored to your specific financial situation. We’ll happily answer all your questions, compare loan options from a wide panel of lenders and offer unbiased advice based on what’s ultimately going to be best for you. To get started on your dream renovation, book a phone appointment with ZEP Finance today.
Frequently Asked Questions
Can a lender use the expected value of my property after the renovation?
For some substantial building projects, a lender may obtain an ‘as if complete’ valuation. This estimates what the property could be worth once the proposed work is finished. The valuer may consider building plans, specifications, contracts and cost estimates when assessing the completed property. Not every project or lender uses this approach, so the valuation method and supporting documents required will depend on the type of work and lending structure.
Could increasing my mortgage result in lenders mortgage insurance?
Potentially. Increasing the amount secured against your property can change your loan-to-value ratio (LVR). If the resulting LVR exceeds the lender’s threshold, lenders mortgage insurance (LMI) may apply and add to the overall cost of borrowing. LMI requirements can differ between lenders, so it is worth understanding how the additional borrowing could affect your LVR before proceeding.
Will I receive all of the renovation funds at once?
Not necessarily. For major structural work or lending arrangements treated similarly to construction lending, funds may be released progressively as different stages of the project are completed. A lender may require invoices, inspections or other evidence before authorising a progress payment. Understanding the lender’s release process before construction begins can help ensure it aligns with the payment schedule agreed with your builder.
Can I change lenders after renovation work has already started?
It may be possible, but an unfinished property can make the lending assessment more complex. A lender may need to consider the property’s current condition, the cost of completing the remaining work and whether the property is acceptable as security in its unfinished state. Lending policies vary, so homeowners who have already started substantial work should establish the lender’s requirements before relying on additional borrowing to complete the project.
What documents might a lender require for a major renovation?
The documents required will depend on the scale and nature of the work. For larger or structural projects, a lender may request a signed building contract, detailed plans and specifications, builder quotes, cost estimates, relevant approvals, evidence of insurance and a progress payment schedule. Preparing the required documents early can help the lender assess the scope and cost of the work and determine how funds may be released throughout the project.
After studying business and finance at university, Zain initially expected to pursue a career in finance. However, his passion for property and the experience of buying his own home led him to mortgage broking. He began his mortgage brokering career in 2009 and founded ZEP Finance in 2010.
