Refinancing

Home renovation loan: which is the best way to finance my reno?

Toni Mladenova
Feb 3, 2021

Table of Contents

Thinking of renovating but not sure how you are going to finance your project?

A home renovation loan could be the answer, giving you the ability to improve the liveability of your home without the expense and hassle of moving.    

Our guide has all the must-know information to help you understand home renovation loans, with answers to common questions like:

  • Why do people renovate?
  • What are the most common home reno projects?
  • How much do home renovations cost?
  • How can I finance my home renovation?
  • What pitfalls must I look out for?
  • Is a construction loan or home renovation loan right for me?

Let’s start by understanding why people renovate and look at some of the most popular projects to revamp your home.  

Why do people renovate?

According to data collected by online interior design and home improvement website Houzz, the top two reasons homeowners renovate their existing home is to ‘stay in their current home or area’, or because renovating is ‘more affordable than moving’. Interestingly the survey found that these motivations were more common than getting a return on investment. 

The survey also shed light on the reasons behind the renovation, with ‘improving design/look and feel (72%) the highest priority, followed by ‘improving functionality’ (68%) and ‘increasing resale value’ (49%). 

Let’s start by looking at some potential pitfalls to look out for when taking on a reno. 

Financing a renovation: pitfalls to look out for

Like any financial commitment you need to do your homework to ensure refinancing is right for you. 

  • Budget your entire project thoroughly otherwise you could end up spending more than you can afford.
  • Research what council permits and approvals you need to obtain - like Development Application (DA) approval - so your renovation is legal, otherwise you could be liable for a fine.
  • If you are renovating to sell a property focus on key rooms like the kitchen and bathroom, which buyers tend to prioritise.
  • If you need to renovate an investment property for rental income focus on practical, cosmetic projects rather than expensive structural renovations, as you are less likely to get a return on these - especially in the short to medium term. 

You also may need to understand which are the most renovated rooms, especially if you are looking for a return on your investment.

Home renovation loans: the most common home reno projects 

What are the most common types of renovations? 

According to the 2019 Houzz & Home Australia report, kitchens are the most popular room to renovate, followed by living rooms, bedrooms, bathrooms and the laundry. 

Let’s take a look at these spaces individually with an eye on what features are popular and a rough estimate of the cost outlay you need to budget for, as this is crucial in allowing you to budget for your home renovation loan. 

Kitchen renovation

Kitchens have traditionally been the heart of the home, and this is even more true as the move to open plan living means it has changed from a purely service function to a space that is more of a food prep/eating/socialising hub. Key renovation trends in the modern kitchen include improved storage via deep drawers, walk-in pantries, island benches and integrated appliances. Colour and materials have moved to organic inspired timber cabinetry, black appliances and custom composite stone benchtops inspired by natural features and patterns.

Kitchen renovation cost: $10,000 - $45,000+ depending on the scale of your renovation, the materials/appliances you choose and how much labour costs. Major cost factors here include imported appliances, benchtop materials and moving plumbing/changing the floorplan.

Bathroom renovation

Bathroom renovations run kitchens a close second in most Aussie home renovation projects, and it is not hard to understand why. Recent trends in bathroom design have been influenced by what luxury spas and hotels provide their guests, with pampering and technology both high on the agenda. Key trends in this space include freestanding baths and vanities, task lighting, patterned tiles, frameless shower screens and all-in-one ‘wet rooms’. Materials like brushed nickel, copper and gunmetal are popular for tapware, while natural materials have also made their way into bathrooms. 

Bathroom renovation cost: $20,000 - $43,000+ depending on the scale of your renovation, the materials/fittings you choose and labour costs. Tiling is a major cost factor for a bathroom renovation, as is moving your plumbing or changing the floorplan.

Laundry renovations

If you dread going into your laundry it is likely it will benefit from a refresh. The modern laundry is all about convenience, practicality and helping you take care of this chore with minimal fuss. Trends in laundry design include integrated washer/dryer and plenty of storage to help keep this area tidy and organised. 

Laundry renovation cost: Archicentre recommends budgeting anywhere from $6,000 to $17,000 for a laundry renovation, with custom cabinetry, tiling and new appliances the major outlays to budget for. 

Home extensions

Extending your home is generally more affordable than selling and buying, especially if you take the associated costs into account - including stamp duty and real estate agent fees. But don’t expect to spend peanuts, besides the cost of materials and labour you also need to factor in getting drawings from an architect or building designer, a DA and planning permit from council, as well as a building permit from a registered building surveyor. Popular home extension projects include adding living/sleeping rooms, attic and garage conversions as well as renovating the rear of terraces to create roomy open plan living spaces. 

Home extension cost: According to design architects Archicentre renovations cost in the range $800m2 to $2,800/m2, while home extension costs range from $1,900m2 to $3,700m2. You can expect these costs to escalate if you are wanting a first floor addition, and you also need to budget separately for permits and consultants fees. 

The next step is to plan your renovation so you avoid budget blowout. 

Planning considerations for your renovation

People often ‘look before they leap’ when it comes to renovating, and pay the price later when their budget blows out or they have problems with the trades they have hired. Take the time to:

  • Budget carefully, research and plan your reno from scratch including the total cost, how you are going to finance it, with a contingency built in for any unexpected costs that may come up. You can use our calculator to work out how much you could potentially borrow.
  • Research who is going to carry out the work for you. If you are thinking of DIY check if you are legally allowed to do this, and that a qualified professional will do a much better job. Get at least three quotes from licensed professionals so you get an idea of current market rates. This also enables you to compare the level of service offered by each business.
  • Choose a licensed builder or tradie as it is a legal requirement for all structural building work, as well as any plumbing, electrical and gas fitting. Depending on which state or territory you live in, other renovation work may also need to be done by a licensed practitioner. You also need to research what local council regulations apply where you live, including permits and building approvals.

Now let’s look at the various financing options for your home renovation.

What home renovation loan is the best option for my reno?

You need to do your homework when it comes to deciding how to finance your renovation.

The most obvious option is to pay for it out of your own pocket, but this is only possible if you have the necessary savings. Otherwise you have a number of other options, including:

  • Use the home equity you have built up on your home loan. Equity is the difference between the current value of your home and the amount owing on your home loan. This means you borrow additional funds against your existing home loan, otherwise known as refinancing. This will be subject to credit approval and will depend on how much of the loan you have paid off to date. You are likely to have higher repayments once the loan is increased so you will need to budget for this. You can use our handy mortgage repayment calculator to estimate your new loan repayment.
  • Use the money saved in your offset/redraw account, which means you don’t take on any further debt. It will however mean you will pay more interest as you will be reducing the amount being offset against your home loan.
  • Take out a personal loan, though these tend to only be for amounts up to $50,000 - so are only suitable for smaller renovation projects. The interest rates on personal loans are also higher than home loans, so will be more expensive.
  • Use a credit card, though this would only be suitable for smaller projects, as they tend to have low spending limits and a higher interest rate than a home loan, but probably comparable to a personal loan.
  • Access current government incentives and grants, such as the HomeBuilder grant. These generally have eligibility criteria which you must meet to qualify. 

It’s important to note that you must choose a financing option that is right for your circumstances. You must have the capacity to repay any additional debt you take on, so do the sums on your renovation before you commit or you could find yourself in financial difficulty. 

Now let’s look at a common question, which type of loan is right for your home renovation. 

Home renovation loan vs construction loan: which is right for me?

A construction loan is designed for major structural renovations, extensions to an existing home, knock down rebuilds or a new build on vacant land, and they work differently to a renovation loan. 

The loan is paid out in pre-defined stages as the build progresses, as opposed to a lump sum. To qualify you will need to engage a licensed builder and/or architect to draw up plans, and you may have to obtain council approval as part of the application process. 

A construction loan is less flexible than a renovation loan as your project has a defined scope and cost structure. The one advantage is that you only pay interest on the amount you have drawn down, as opposed to the full amount. 

Considerations before you refinance your home loan‍

Like any financial product - especially considering the scale of the commitment involved - you should consider whether refinancing your home loan is the right option for you.‍ Some things to ask yourself include:

Will I have to pay break costs?‍

You will have to pay break costs if you have a fixed rate home loan and the fixed term hasn't expired. These are likely to be relatively high so you need to decide if they are worth it. ‍

How much equity do I have?‍

You will need to have built up at least 20% equity in the property, or you will have to pay lenders mortgage insurance (LMI), which is another cost to budget for. The savings you make by refinancing need to outweigh this additional cost.  ‍

What is the value of my property?‍

Property is generally a reliable and stable investment, but like any investment it can experience ups and downswings. If you are looking to refinance you need to know the current value of your property, because if it has dropped it would be better to hold off until there is a shift in the market.

Switch lenders or stick with my current lender?

It’s tricky deciding to switch lenders or stick with your current home loan provider. Keeping your mortgage with your current lender is less hassle, with less paperwork, but could get a better deal from a new lender as most home loan lenders offer their best deals to new customers. You should also ask your current lender if they will match any offers from competitors. 

You should also be aware of the home loan application process.

Refinancing: The home loan application process

If you're staying with your current lender you still need to submit an application, though the process is easier than switching.   

At Yard, you can apply online, and one of our home loan consultants will call you within 24-hours to talk you through the rest of the application process. They will let you know what supporting documentation is required as part of your application. 

If you do switch lenders - and discharge your existing loan, there is more paperwork, but it is a fairly painless process. Once your new home loan is approved, your previous home loan will need to be discharged. Your new lender will send a discharge form to your previous lender. They'll then exchange all the necessary documentation and process the title transfer for you. Your new home loan will then enter the settlement stage, and your new lender will work with your previous lender to pay out your old home loan. If you have accessed your equity, you should also receive these funds or be told how to access them. 

Armed with this knowledge you should now be in a better position to understand the financing options for your home renovation project.

Have any questions about home renovation loans or refinancing? We’re here to help with our local team are available to chat at a time that suits your schedule.

Toni is the CEO of Yard

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