Top 4 Ways to Use Your Home Loan to Fund Your Dream Renovation

You’ve got your dream home renovation all mapped out: polished marble island bench, all-new black cooking appliances, a skylight to bring in more natural light (and that’s just the kitchen).The only problem is, how will you fund it? Before you start engaging tradies, your first step should be to determine how much money you actually have to work with and set yourself a realistic budget to stick to.

Depending on the size of your project and your financial situation, there are a number of ways you can fund your renovation. We spoke to one of our brokers, Nathan, to outline into the top options for using your home loan to fund your renovation.

1. Refinance to unlock the equity in your home

With housing prices booming, many homeowners have seen a strong growth in equity in their home. If you’re not familiar with the concept of equity, it’s simply the value of the property minus any outstanding loan, so if your property value increases, so does the amount you can borrow.

The most common way to access the equity in your home is by refinancing your home loan. This is a great option for renovators because home loans tend to have a much lower interest rate than personal loans or credit cards. That being said, accessing additional funds will essentially increase your repayments, so it’s a good idea to speak to a mortgage broker to advise you on your options to ensure you get the best deal. “Refinancing provides a good opportunity to make sure you’re getting the most competitive rate – something you may miss out on by just topping up your loan with your current lender,” says Nathan.

2. Redraw on your home loan

A redraw facility is a common loan feature that allows you to access additional repayments that you’ve made on your home loan. Some lenders allow you to access a certain number of redraws without fees, but it’s worth checking before you redraw.

3. Topping up (increasing) your home loan

Topping up your home loan allows you to borrow additional funds on your existing home loan without having to take out a separate loan. This may be a quick option to take with your existing lender, however the downside is that by not evaluating multiple lenders, you may forgo the opportunity to get the most competitive interest rate. While you may save some time, it could result in you paying more in the long term. A mortgage broker can help you assess a variety of options across multiple lenders to find a loan suitable to your needs.

4. Taking out a construction loan

For a more expensive project such as an extension, building an additional story or a complete knock-down rebuild, a construction loan may be a wise choice. A construction loan enables you to draw funds from the loan progressively at each construction stage, rather than borrowing the full amount all at the beginning of the project. “This option has the potential to save you quite a bit on interest payments on a large loan, as you may only need to pay interest on the progress payments made up until the loan is fully drawn,” says Nathan.

Other things to consider

There may be other financing options to consider, depending on your situation, though they are generally much more costly. These include personal loans, lines of credit and credit cards, all of which attract much higher interest rates than home loans. It’s also worth noting that there may be hidden fees to take into consideration, including lenders mortgage insurance, application and discharge fees, break fees and valuation fees, to name a few.

This article is intended to provide general information of an educational nature only. It doesn’t take into consideration your personal financial situation and should not be relied upon as financial advice.

Image credit: Long Nguyen.