Using Equity To Renovate Your Home

Using your existing home equity to renovate your home can be a great option. Find out how and compare your options with Savvy.

Last updated on April 20th, 2022 at 04:06 pm by Cate Cook

How to use equity to renovate your home

If you’re thinking of renovating your home or adding an extension, you may be wondering how to use your home equity to finance it.  Using your existing home equity to renovate is often a great way of quickly and easily accessing the finance you’ll need.  Find out how to use your loan equity to renovate, as well as compare your options for doing so, with Savvy today.

What is home equity and how can I use it to renovate?

Home equity is the difference between what you owe on your home and how much it’s worth.  Your home equity increases as you pay off your loan and the value of your house increases over time. For example, if you owe $350,000 on your home and it’s now worth $600,000, you have $250,000 worth of equity.  You can use this as security to borrow more money to finance your renovations.

You can still only borrow 80% of the value of your home, though, so you’ll need to calculate your useable equity.  In the example above, you may have $250,000 worth of equity, but 80% of the value of your home is $480,000, so your usable equity is the difference between 80% of the value of your home and what you owe.  In this case, the usable home loan equity is $480,000 – $350,000 = $130,000.  This is the amount a lender may consider loaning you if you want to use your home loan equity to renovate.

What are my finance options for accessing my home equity?

There are several ways to use your home loan equity to renovate, which include:

  • A top-up loan – you keep the same loan as before, but the principal sum you borrow is increased to cover the cost of your renovations
  • Refinance to a new loan – you refinance to a new, larger loan (either with the same lender or another)
  • Keep your existing loan and take out a home equity loan (line of credit loan) – this is an additional loan which allows you to withdraw up to your useable equity amount to renovate your home
  • Split your existing loan – you can choose to split your existing loan into two parts (one with a fixed interest rate and another with a variable rate) and increase just one portion of your split loan to finance your renovations.  It would make sense to increase the portion with the lowest interest rate.

What are my alternatives to using equity to renovate my home?

Your alternatives to using your equity include:

Redraw funds you’ve previously contributed

You may have been making additional repayments on your home loan to get ahead and pay less interest as you pay your loan off sooner.  If you have a variable loan which allows redraws, you could redraw your additional deposits to pay for your renovation.

Use savings you’ve stashed away in your offset account or high-interest savings account

If you have an offset account, you may have been storing funds in this account to reduce the interest you pay on the principal you borrowed.  If you do have savings in your offset account or a savings account, you could use these savings to finance your renovation, although of course you will lose the offset benefit of these funds and will pay the full amount of interest owed on your principal.

Take out an additional construction loan

Another option to finance your renovations would be to take out a separate renovation construction loan.  To do this, you will need to provide all the usual information required for a loan application, including evidence of your income, your outgoings and your assets. 

Naturally, you’ll need to prove that you can afford the repayments required on your new loan in addition to your existing loan. Construction loans are usually fixed interest-only for the building duration, then revert to variable principal and interest loans thereafter.  Depending on the size of the renovations, you can borrow up to 95% of their value, meaning you’ll only need a small cash deposit upfront.

Top tips for using your home loan equity to renovate

Plan how much your renovations will cost

Approach your lender with a clear idea of how much you want to borrow so that you can receive the most appropriate advice.  The best loan option for you will vary depending on whether you want to borrow $20,000 or $200,000 for your renovations.

Don’t over-capitalise

If you have a healthy amount of home equity, it could be tempting to plan extensive renovations or major building works to increase the size of your home.  However, it’s always worth looking around at the homes in your street to make sure that you don’t over-capitalise your home for the area you live in.

Work out which type of loan is best for you

Once you’ve established some home loan equity, there are many options available to you when you want to use it to renovate.  Take your time to do plenty of research to work out what your best loan option is, as there are many different types of loan available to fit your circumstances.

Compare products and lenders

Once you’ve worked out what type of loan you require and how much you wish to borrow, use Savvy to help you compare lenders so you find a loan which is just perfect for you.  Savvy has been helping Australians find and compare loans for over a decade, so we’re here to help you free of charge.

Pros and cons of using your home equity

PROS

Save money on loan fees

It can be cheaper to get a top-up to your existing mortgage with your existing lender compared to paying full loan application fees for another loan with a new lender.

Lower interest rate

It will certainly be cheaper using your home loan equity to finance your renovations in comparison to taking out a personal loan or using your credit card.

Avoid another loan application process

If you stay with your existing lender and top-up your existing loan, or split it and increase one portion of it to finance your renovations, you could save yourself the time it takes to go through the loan application process with a new lender.

Looks better on your credit record

It may look better on your credit record to have one loan with a single lender (albeit for a larger amount) rather than taking out a second personal loan possibly with another lender

CONS

Longer to pay off your loan

If you get a loan top-up and increase the amount you borrow, assuming your mortgage repayments remain the same, it will take you longer to pay off your loan.

Cost more in interest overall

Naturally, you’ll pay more interest on the increased principal sum you owe, so your loan will cost more in interest overall.  You can reduce the amount of interest you pay by increasing your loan repayments to cover the additional amount you’ve borrowed to pay for your renovations.

Going backwards instead of forwards

You may have been making additional repayments and watching your loan reduce with pride – but refinancing, by either topping up your loan or taking out another loan, will increase your debt and send you backwards in a financial sense.

Some more frequently asked questions about home loan equity

Will I still have to have a 20% deposit?

Yes – you will still only be able to borrow 80% of the value of your property (or the estimated value after renovations have been completed) unless you’re prepared to pay Lenders Mortgage Insurance.

Would I be better off getting a construction loan?

Construction loans tend to be approved for larger amounts (often $100,000 or more) so if your renovations are going to cost less than this, you may be better off considering other options.

Could I get a personal loan to pay for my renovations?

Yes – you could apply for a personal loan to finance your renovations.  However, this may not be the cheapest option for you, as the interest rates charged on personal loans tend to be higher than interest rates on home loans.  Additionally, because these loans are capped at $50,000 unsecured, they may not meet your needs if your renovations are more substantial.

If I stay with the same lender, how will using my equity affect my credit record?

If you simply change the terms or amount of your loan but stay with the same lender, there may not be any notation on your credit record.  If you switch to another lender and take out a completely new loan, this will be recorded on your credit file (and may count in your favour, as you will have successfully paid off one loan as you refinance to another lender).

Is a line of credit loan a good idea for using my equity?

If you are contemplating doing the renovations yourself, it’s worth considering a line of credit loan.  The advantage is that you only pay interest on the amount you currently have outstanding, rather than paying interest on the full loan amount from day one.  For example, if you’re renovating a bathroom, you may need $5,000 initially to buy a new bathtub and shower screens but you may not need to pay for a tiler for several months.  With a line of credit, you would only pay interest on the $5,000 rather than paying interest on the whole loan from day one.

Is topping up my existing loan cheaper than refinancing?

It may be cheaper to top-up your existing loan (and pay a top-up fee, which typically is around $250 to $400) rather than pay to close your existing loan and refinance to another (which could involve mortgage discharge fees, new loan establishment fees and possible new annual fees).  If you pay an annual package fee, top-up charges are often waived, so getting your additional money to refinance won’t cost you extra.