[Video] How to Use Your Home Equity to Fund Renovations
Thinking about upgrading your home? Whether you’re modernising your kitchen or planning a major extension, using the equity in your home can be a smart way to fund your renovation.
But not all renovations – or equity strategies – are created equal. Let’s break down your options depending on the type of renovation you’re planning and how much usable equity you currently have in your home.
What Is Equity and How Can You Use It?
Equity is the difference between your property’s current market value and the remaining balance on your home loan. As an example, if your property is worth $1,000,000 and you owe $500,000, you have $500,000 in equity.
Banks often allow you to access up to 80% of your property’s value (sometimes more), and you can use this to finance renovations – provided you meet their lending criteria. With that said, let’s go through how you can use your home equity to fund renovations.
Renovation Types and Funding Strategies
1. Structural Renovations
Examples: Adding new rooms, floor space extensions, or any major construction work around your home.
If your renovation involves changing the structure of your home, you’ll usually need:
- Council Development Approval (DA)
- Detailed plans and builder quotes
- A Construction Loan
With a construction loan, the bank manages the release of funds in stages – also called progress payments – based on the completion of key project milestones. This ensures the money is being used appropriately and helps keep the project on track.
Key Takeaway: Structural renovations = construction loan + bank-controlled payments.
2. Non-Structural Renovations
Examples: Painting, replacing windows, kitchen or bathroom upgrades.
Here, there are two common scenarios:
2.1. You Have Sufficient Equity
Let’s say:
- Property value: $1,000,000
- Current loan: $500,000
- Renovation cost: $200,000
Because your loan is well below 80% of your property’s value, you can likely do a standard equity release. This is based on your home’s current condition, and the funds are released upfront. There are no bank-controlled payments and no construction loan required.
Key Benefits
- Simpler process
- Funds can be used flexibly
- No need to pay Lenders Mortgage Insurance (LMI)
2.2. You Have Limited Equity
Now imagine:
- Property value: $1,000,000
- Current loan: $700,000
- Renovation cost: $200,000
In this case, your equity might not be enough to fund the entire renovation – especially if you want to avoid paying Lender’s Mortgage Insurance (LMI). To solve this, some lenders allow an “as-if-complete” valuation, where they assess your home’s expected value at the completion of the renovations.
You’ll need to provide:
- Renovation plans and specifications
- A scope of works
- Builder quotes or invoices
Example Calculation:
- Estimated value post-renovation: $1.1 million
- 80% of $1.1M = $880,000
- Existing loan = $700,000 → Borrowing room = $180,000
- Shortfall = $20,000→ Covered by savings or other funding
In many cases, this will still require a construction loan and bank-managed progress payments.
Quick Comparison: Renovation Funding Options
| Renovation Type | Loan Type | Valuation Used | Bank Controls Funds? | LMI Risk? |
|---|---|---|---|---|
| Structural | Construction Loan | Post-renovation | Yes | Rare |
| Non-Structural (2.1) | Equity Release Loan | Current value | No | No |
| Non-Structural (2.2) | Construction Loan | As-if-complete value | Yes | Avoidable (<80% LVR) |
Final Thoughts
Tapping into your home equity can be an effective way to fund renovations – but choosing the right loan structure depends on your plans and financial situation. Structural renovations typically require a more complex setup, while cosmetic upgrades may be easier to finance through a simple equity release loan.
If you’re unsure which option is best for you, speak with a mortgage broker or lending specialist who can assess your equity, walk you through the process, and help you avoid unnecessary costs like LMI.
