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Using equity to renovate your home

You may be able to fund your renovating dreams with a home loan increase, but there are a few things you should think about first.

It probably comes a close second to the great Australian dream of home ownership when it comes to national obsessions – renovation.

You might be renovating to expand as your needs change, fixing up an older property or want to upcycle your home to increase its value. Whatever your plan, one thing is unavoidable – renovations cost money.

But this is where home equity may be able to help. If you’ve owned your property for a while, you may find that you have some equity in your home. If this is the case, a home loan increase may allow you to leverage the equity you have in your property to fund renovations.

What is home equity?

Equity is the percentage of the total property value you actually own. It grows as you pay off your mortgage and reduce your loan balance. Equity also builds up as the property value appreciates.

Your usable equity is the amount you may be able to access to pay for your renovation (or other things, such as buying a car or consolidating debt).

You can work out roughly how much usable equity you have in your property using our equity calculator. The maximum you can borrow including your existing loan is up to 90 per cent of your property value. In a situation where your LVR is likely to go higher than 80 per cent after the loan increase, you might also need to get Lenders Mortgage Insurance.

Home loan increase and renovations – what’s your scope?

One of the first things you need to work out is the likely size and cost of your renovation. You can use a loan increase to fund a renovation that costs $250k or less, as this is considered a standard or cosmetic renovation and might cover things like getting a new kitchen and appliances.

If your renovation budget is likely to be over $250,000 then you could opt for a construction loan. With this loan type, the builder will provide a fixed price contract that contains a progress draw schedule for payments in stages. Your construction loan lender (ie us) will draw down from the loan to pay the builder when they complete specific stages of your renovation. You only pay interest on the amount you’ve used, rather than the entire loan amount.

Home loan increase and renovations – what type should I choose?

If your renovation is under $250k and you have enough usable equity in your home, there are two types of loan increase you can look at.

The first method is to apply to increase your existing home loan – this is commonly referred to as a home loan top-up. When this type of loan application is approved, you will keep your existing home loan type, rate and account number – we then increase the limit of your home loan account with extra funds that you can withdraw and use to renovate. Top ups only work with variable rate home loans and renovations that don’t involve construction.

The second option is to use your equity to add a separate, supplementary loan that might have different features, a different interest rate and even a different repayment term. This option might be simplest if your main home loan is on a fixed rate, as you might not be able to increase the balance on such a loan without incurring break costs.

Home loan increase and renovations – what do I need to provide?

If your renovation is under $250k, we treat it as a standard application. This means we’ll need information about your current living expenses, financial position, and evidence of income so we can see that you’ll be able to comfortably make repayments on the extra amount you’re borrowing.

Where the cost is over $250k, we need additional documentation depending on the type of work being done. This may include things like usually council approvals and a fixed price building contract. If this is the loan option for you, keep in mind that you will need to provide evidence of the works as the renovation progresses. But don’t worry – we’ll be a phone call away to walk you through exactly what is required at each stage of your reno.

If you have any other questions about loan increases or renovation, request a call back to talk to a Home Finance Manager about your options.

Things you should know

Conditions, credit criteria, fees and charges apply. Residential lending is not available for Non-Australian Resident borrowers.

This information has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information and, if necessary, seek appropriate professional advice. This includes any tax consequences arising from any promotions for investors and customers should seek independent advice on any taxation matters.

Key Fact Sheet for Home Loans