Four ways to fund your home renovation | Business

Equity release / top-up home loan

This is probably the most common way people borrow money when they want to complete minor cosmetic renovations that are non-structural. It involves borrowing against the current value of your home, before any value-adding renovations and in most cases, allows you to obtain the funds upfront. You won't be able to borrow the full value of your home but, without mortgage insurance, you can usually borrow up to 80 per cent of its value.

Construction loan

If you're planning to completely transform your home, this may be a good option, as you can spread the cost over a longer period. You could even possibly borrow up to 90 per cent of the end value of your home and take advantage of mortgage rates. With a construction loan, the lender will assess the value of your home after the renovation based on the building plans and you can typically borrow against that value. You won't be given the full loan amount upfront, but usually in staggered amounts over a period of time - this is called 'progress payments' and is linked to a fixed price building contract which will be from your builder.

Line of credit

When you apply, you can establish a revolving credit line that you can access whenever you want to up to your approved limit. You only pay interest on the funds you use and, as you pay off your balance, you can re-borrow the unused funds without reapplying if that becomes necessary. However, care must be taken not to get in over your head in terms of serviceability. Make sure you can make repayments on the line of credit that will reduce the principle because your minimum repayment only pays the interest, it will not reduce the loan. Rates on this product are typically much higher than a construction loan or top-up loan. This product feature is great if managed well, but can also be a trap if not seriously considered, as your limit will never change.

Personal loan

If you're only making minor renovations - personal loans are usually capped at around $30,000 - this might be suitable, but interest rates on personal loans are higher than on home equity loans and payments need to be made usually over a maximum of seven years.

Homebuilder package

If you're looking for further assistance to be able to afford your property renovation project, the Federal Government recently announced $25,000 grants for eligible Australian owner-occupiers to build a new home or substantially renovate an existing home. Income and other conditions apply and this grant program is active until December 31, 2020 - you are required to enter into a building contract between June 4 and December 31 and construction must commence within three months of the contract date. To qualify you need to substantially renovate your existing home as a principal place of residence.

There are very few exceptions to the rule that your renovations should add more value to your home than they will cost to carry out. Think about how the money you spend on a renovation will increase the value of your property.