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Renovations and Loan Funding: Funding Your Improvements

You’ve bought a property, and now you want to renovate. There are several ways to fund improvements, each with different costs and implications. Here’s what to consider.

Option 1: Pay from savings

Pros: no debt, no interest, straightforward. Cons: depletes your emergency fund, might not be enough capital.

If you have AUD 50,000 in savings and renovations cost AUD 80,000, you’d need to look elsewhere.

Option 2: Redraw facility

If your home loan has a redraw facility and you’ve made extra payments (or have equity), you can redraw that money for renovations.

Pros: quick, no new application, interest is the same as your mortgage. Cons: reduces your loan payoff speed, redraw might take a week to process.

Example: you have a AUD 500,000 loan with AUD 20,000 in extra payments. You can redraw AUD 20,000 for renovations.

Cost: if your mortgage is 4.5%, the redraw costs 4.5% interest (same as the mortgage).

Option 3: Refinance and extract equity

Refinance your home loan for a larger amount and use the difference for renovations.

Pros: locks in one loan, spreads cost over mortgage term (25+ years). Cons: refinancing fees (AUD 1,000–AUD 3,000), longer repayment period increases total interest.

Example: you have a AUD 500,000 loan, property now worth AUD 650,000 (you’ve paid it down to AUD 450,000). Refinance to AUD 530,000, extract AUD 80,000 for renovations.

Cost: refinancing fees + interest on the additional AUD 80,000 over 25 years at 4.5% = roughly AUD 45,000 in additional interest.

Worth it if: renovations add significant value (e.g., new kitchen adds AUD 60,000 in value, net gain AUD 15,000 even after interest cost).

Option 4: Personal loan

Take out a personal loan specifically for renovations.

Pros: faster than refinancing, keeps mortgage intact. Cons: higher interest rates (typically 6%–10%), shorter repayment period (3–7 years) means higher repayments.

Example: AUD 80,000 personal loan at 7% for 5 years = AUD 1,581/month, total interest AUD 14,900.

When it makes sense: if you’re only borrowing AUD 20,000–AUD 30,000 and want to repay quickly. For larger amounts, refinancing the home loan is cheaper.

Option 5: Construction loan

For major renovations (extending the home, adding rooms), some lenders offer construction loans similar to new-build loans.

Pros: funds released in stages matching renovation progress. Cons: more complex than a personal loan, requires detailed plans.

The math:

Renovations of AUD 80,000:

Scenario A (personal loan): AUD 80,000 at 7%, 5 years = AUD 14,900 interest Scenario B (refinance mortgage): AUD 80,000 at 4.5%, 25 years = AUD 45,000 interest (but spreads over 25 years)

Scenario A costs more in total interest, but the loan is repaid faster (5 years vs. 25). Scenario B spreads the cost and has lower interest rate, but locks you into debt longer.

For AUD 80,000+ renovations, refinancing is usually cheaper. For smaller amounts, a personal loan might make sense.

Value vs. cost:

Before borrowing for renovations, ask: will this add value?

Kitchen renovation: typically adds 70%–100% of cost in value. AUD 30,000 spend adds AUD 21,000–AUD 30,000 in property value. Worth borrowing for.

New living area: adds value.

Cosmetic updates (paint, flooring): adds 50%–80% of cost. Worthwhile if you’re planning to sell.

Swimming pool: typically loses money. Adds AUD 20,000–AUD 30,000 in cost but only adds AUD 10,000–AUD 20,000 in value (and ongoing maintenance costs).

Avoid borrowing for renovations that don’t add value, unless it’s for personal enjoyment and you’re happy to carry the cost.

Strategy:

  1. Get renovation quotes before deciding how to fund
  2. Calculate value-add (will renovations increase property value?)
  3. If value-add is good, refinance and spread the cost
  4. If value-add is moderate, consider a personal loan for 5-year repayment
  5. If value-add is low, save and fund from cashflow

My take:

Don’t over-renovate. Many people spend more on renovations than they recoup when they sell. Do high-value work (kitchen, bathrooms, living areas) and avoid money-losing frills.

If borrowing, refinance for major work (cost-effective) and use personal loans for smaller projects (simpler).

And always ask: do I need this renovation, or do I want it? Needs are worth borrowing for; wants are better funded from savings.