How to finance your new home renovation

by | Apr 29, 2021


If you’ve heard the knock of hammers and scream of saws lately – you aren’t alone. Australia is well and truly in a new “renovation age” according to reports. A third of homeowners plan to renovate over the next five years with an average investment of $80,000. The Home Industry Association predicts Aussies will spend $38.5 billion on renovations, up $2 billion on last year. 

However, people can fund them in different ways, including using savings, drawing on equity, refinancing their mortgage, or even by applying for a cheap personal loan. With the multitude of home renovation finance options, it is worth exploring each in more depth to learn about their respective pros and cons.

Using savings

According to a survey by Houzz, 80% of respondents said they are using cash they’ve saved to fund their home renovations. If you have the money, it can definitely be an option – there’s no question about releasing funds or applying for them. But there may be a temptation to spend more than you anticipated if you change your mind or costs suddenly increase – especially if you decide on using sustainable products and fixtures. With other options, you have a set budget that you must account for.

Putting it on the credit card

For smaller renovations – or big ones depending on your credit limit – you can fund much of your home renovation by putting it on the plastic – (20% do, according to Houzz). If you do, be prepared to pay within the interest free period (if you have one) or pay revolving interest; way more than any mortgage or alternative loan.

Unlocking home equity

14% of Houzz survey respondents said they’ve opted for a home equity release to fund their renovation. A home equity release is borrowing more against the value of your home to spend on upgrades and improvements. The logic seems sound – the more you spend, the higher your house value goes up. That may be so, but you’ll be paying more in interest and fees if you aren’t prepared to up your repayments, as finance expert and Savvy Managing Director Bill Tsouvalas says. 

“If you borrow against your mortgage, that will increase the principal and lengthen the term of your loan. Adding a couple of years to a loan that’s already in the hundreds of thousands will mean paying tens of thousands more in interest than what’s necessary. It’s why opting for a cheap personal loan will result in much reduced interest, which is better for your hip pocket.”

finance your new home renovation Applying for a cheap personal loan

A personal loan for renovation purposes, as Bill says, will result in paying less in interest compared with a mortgage that’s extended by an equity release. “Though interest rates look higher on paper – and they are – the loan terms are much shorter. A mortgage is usually 25 to 30 years; a personal loan about five. You will pay far less in interest; somewhere in the range of a quarter to a tenth than if you opted for a home equity release.”

Remember to consult a financial professional before considering any type of financial product.