How to fund a renovation with your home loan

Property renovation is not only a great way to improve the value of your biggest financial asset but a sensible strategy to enhance your lifestyle without the expense of buying a new home.

State government stamp duty fees are significant in most states. If you love your neighbourhood, it can make little sense to go through the upheaval of moving to relocate just down the road.

For many city properties, the amount paid in stamp duty could cover the cost of a new kitchen, bathroom or a granny flat.
You still have to finance your renovation, though. A popular approach is to use the equity in your home – that is, the difference between a lender’s valuation of your property and the amount you owe on it. It means you need to apply for a Home Equity Loan, or line of credit loan.

If you want to go beyond the 80% Loan to Value Ratio – known as LVR – your lender may require Lender’s Mortgage Insurance. This protects the bank against you defaulting.

Not every loan arrangement will allow you this flexibility, so it’s best to talk to your mortgage broker about the best deals based on your specific circumstances. However, here are a seven pointers to get you thinking:

1. Change horses

The home loan market is complex and competitive. Few owners who take a 20- or 30-year loan stay with the same lender over that period so it’s perfectly normal to refinance and change lenders but remain in the same property.

2. It’s not personal

Refinancing your home is cheaper and more practical than sourcing a personal loan.

3. Construction loan

These are available for major works that will result in your property being more valuable. An example might be adding an extra storey. In this arrangement, you pay for the funds you use, not the amount you borrow.

4. Renovation budget

Source quotes so you know how much you’ll need to do the renovations you envision. Add 20% of the total to cover unforeseen problems and delays. (Do you know anyone whose renovation has finished on time and on budget?!)

5. Fees dilemma

If you stick with the same lender, it can be possible to negotiate away refinancing fees. Switching lenders for a better interest rate may involve fees, so talk to your broker to work out the best deal for you.

6. Apply here

Refinancing requires the agreement of your lender. Your application might take a few weeks and you’ll need your paperwork lined up so give yourself time to get it organised.

7. Quick-draw

Another strategy is to draw down on any additional money you’ve paid on the principal of your loan if your current mortgage structure permits. Talk to your broker to understand if this is a better option than refinancing.