Top Strategies to Refinance and Fund a Home Renovation

Your home may hold more borrowing power than you realise, and many homeowners consider using that equity for a renovation.

For Hawthorne homeowners, the decision usually comes down to one question: can you borrow enough against your property to fund the renovation, and will the repayments still suit your budget? This article walks through how that works, using one worked example at an illustrative rate.

How Does Refinancing to Release Equity Work?

Refinancing to release equity means replacing your current home loan with a new, larger one, then taking the extra amount as cash or a loan limit for a purpose such as renovating. Your existing loan is paid out, and the new loan covers that balance plus the extra funds.

Equity is the gap between what your property is worth and what you owe. If you want to renovate, a lender will look at that gap, your income, your expenses and your other debts before approving a higher loan. A mortgage broker can compare lenders for you, but the basics are the same whichever one you choose. You can read more about how we approach refinancing on our website.

How Much Usable Equity Do You Have?

Your usable equity is the amount you can borrow against your home while staying within a lender's loan to value ratio (LVR) limit. A common way to estimate it is to take 80% of your property's value and subtract your current loan balance.

The LVR is your loan balance divided by your property's value. Borrowing above 80% LVR may add costs such as lenders mortgage insurance, depending on the lender. That is why many homeowners aim to keep the new loan at or under that level.

The value used is the lender's valuation, which can differ from an online estimate or an agent's appraisal. Your borrowing power also matters. Having equity does not mean you can service a larger loan, so it is worth checking your borrowing capacity before you commit to a renovation budget.

Renovation Example: Topping Up a Loan to Fund Works

Consider a Hawthorne homeowner with a property valued at $2,000,000 and a loan of $1,100,000, which is an LVR of 55%. They want to renovate the kitchen and bathrooms and have quoted works of $100,000.

An 80% limit means they could borrow up to $1,600,000 in total. After adding $100,000, their loan is $1,200,000, so their LVR rises to 60%, which keeps it under the 80% mark. The method is (existing loan + $100,000) divided by property value. The lender still needs to approve the application based on income and expenses.

As an illustration only, the extra $100,000 at a 6.75% p.a. rate over a remaining 25-year term would add roughly $691 a month in principal and interest repayments. Actual repayments depend on the lender, the rate and the loan structure. The homeowner checks that figure using the loan repayment calculator and confirms it fits their monthly budget.

The outcome is that the renovation is funded through the refinance, the loan stays under 80% LVR, and the homeowner knows the added repayment before signing. The trade-off is that they will pay interest on the renovation for as long as the debt lasts.

Top-Up Loan or Refinance: Which Suits a Renovation?

A top-up with your current lender can be quicker, while refinancing to a new lender lets you compare rates and features at the same time. The right choice depends on your current rate, your loan features and your lender's policies.

If your current loan has a rate you are happy with, a top-up may be enough. If your rate has drifted above what other lenders offer for your situation, refinancing your home loan could lower your repayments at the same time as releasing equity. If you are coming off a fixed term, it is worth reviewing fixed rate expiry timing first, because break costs can apply if you leave early.

A loan health check is a practical starting point. It shows where your current loan sits before you decide which route to take.

What Are the Costs and Risks of Borrowing Against Your Home?

The main costs are extra interest, possible lender fees and a longer time to pay off your home. The main risk is that your home secures a larger debt, so a drop in income or a rise in rates puts more pressure on your budget.

A few points are worth weighing up:

• Spreading the added debt over a long loan term lowers repayments but increases the total interest you pay.
• Property values can move, so equity that exists today may change.
• Renovation costs often run over quote, so a buffer in your budget is sensible.

Some homeowners make extra repayments on the renovation portion to reduce the interest over time, if their loan allows it. Ask your broker whether a split loan or an offset account would suit your plans.

Should You Stage the Funds for a Larger Build?

For major works such as an extension or rebuild, staged payments through a construction loan may suit better than a lump-sum top-up. With a construction loan, funds are released as the work progresses, so you pay interest only on the amount drawn.

That can reduce interest costs during the build. The trade-off is more paperwork, as lenders usually want to see approved plans and a fixed-price builder contract before they release funds. Our page on construction loans explains how this works in more detail.

Hawthorne sits on the Brisbane River in the city's inner east. Whatever your plans, the goal is to match the loan structure to the work.

If you are weighing up a renovation, call one of our team or book an appointment at a time that works for you. We will work out your usable equity, compare lender options and show you the repayments before you commit.

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