How refinancing your home loan can help finance your dream home renovation

Financing home improvements can be expensive, but using your home equity can be a cost-effective way to get the most out of your renovations.

Here’s how to unlock equity in your home by refinancing and how you can use the funds to make improvements to your home.

What is equity and how much equity could I access?

Equity is the difference between the total value of your property and your remaining mortgage balance. For example, a homeowner with a property valued at $ 800,000 and a home loan of $ 400,000 has $ 400,000 in equity.

When refinancing to free up equity, lenders generally allow you to borrow up to 80 percent of the property value. This is known as yours usable equity.

As your equity grows over time as the value of your property increases, and as you repay your mortgage, it is important to consider that access to equity can increase your total debt, says Lianna Mills, Senior Mortgage Specialist at Domain mortgages.

“When you release equity, you increase the amount you owe on your property,” she says.

“Therefore, you increase your installments and the interest you may be charged throughout the loan period.”

“But provided [the renovations] will improve the value of the property, they should ideally be able to earn the money back. ”

How can I unlock equity in my home?

Homeowners can unlock their usable equity by refinancing their current home loan. This is known as one cash-out refinancing.

A cash-out refinancing involves replacing an existing home loan with a new, typically larger loan to allow for the release of usable equity.

But the critical difference between a payout refinance and a standard refinance is that lenders usually need an explanation of what the equity is being used for, Mills says.

“When lenders release money, they need to know the purpose of the funds,” she says. “In general, they just need to know what is being done and approximately how much it will cost.”

Are there any restrictions on the renovations I can make with equity?

While lenders typically require an explanation as to what home improvements equity will finance, the range of improvements homeowners can make is usually quite broad, Mills says.

“Most lenders have pretty flexible policies,” she says. “But when the term ‘structural renovation’ is part of the conversation, there are limitations on lenders.”

If you want to carry out extensive renovations that involve significant structural changes, such as adding another floor, reconfiguring the layout, or expanding your home, you may need a construction loan.

A construction loan is a type of home loan intended for people who are building a new home or renovating an existing home. The loan is paid in installments, usually to the developer, at key stages of the construction process.

What kind of renovations can add maximum value to my home?

Two main spaces are the key to adding value to any home, says designer and renovation expert Naomi Findlay.

“Kitchens and bathrooms are where your greatest value can be achieved,” she says. “Customizing floor plans or adding something it did not have before, especially features that the market values ​​and is looking for, is always the first port of call.”

Exploring options with the footprint you have, such as increasing natural light by adding a window or skylight or opening the kitchen space to the living and dining area, are great ways to add value without structural impact.

Increased natural light can help transform a space without making significant structural changes. Photo: Christian Quinlan

Outdoor space is also the best property to create value, as it is often more cost-effective and easier to do it yourself, Findlay says.

“It could be as simple as finishing your deck, putting a cover over your deck or creating a beautiful little paved outdoor area,” she says. “Any of those things can be really good, and unlike some other major projects, they’re things that people can bite off and do themselves.”

Refreshing outdoor spaces can be an easy and cost-effective way to enhance the space.
Refreshing outdoor spaces can be an easy and cost-effective way to enhance the space. Photo: Hudson McHugh

What are some other ways to finance a renovation?

Homeowners can also access funds to finance home improvements by increasing their home loan, known as a repayment of home loan.

A home loan repayment allows you to borrow against the equity you have built in your home while staying with your current lender, and that is the equivalent of applying for a new loan, Mills says.

“The same rules apply as for an initial home loan or refinancing with another lender,” she says. “It is, [borrowers] must provide all relevant documentation when applying to confirm that they have the capacity to borrow extra. ”

However, mortgage repayment is generally not available to mortgagees with a fixed or guaranteed interest rate mortgage without breaking their contract.

ONE redraw facilitywhich allows mortgage holders to deduct any additional mortgage repayments they have made could be another cost-effective way to finance renovations, Mills says.

“When you withdraw on your home loan as you use your own funds, there is no change in your home loan repayment or loan period,” she says. “And even if your lender has a small cost to deduct, which most lenders do not, it would be minimal compared to the cost and application process of refinancing or supplementing your home loan to finance improvements.”

How to use equity to finance a home renovation

  • Equity is the difference between the value of your home and the balance of your home loan.
  • You can access equity by refinancing, which typically increases your home loan balance.
  • Equity can be used to finance most non-structural renovations.
  • Other ways to finance a renovation include a home loan repayment or a resumption facility.
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Domain Mortgage, Credit Representative 500208 at Auscred Services Pty Ltd, Australian Credit License 442372.

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