How can I use my equity to fund renovations?

Renovations don’t come cheap, which is why many homeowners give themselves a few years to build up a bit of equity in their home loan to help fund their renovation.

What is home equity?

Home equity is the proportion of the total property value that you own outright. It’s the difference between the amount you still owe on your home loan and the current value of the property. For example, if your home is valued at $500,000 and you currently owe $250,000 on your mortgage, your home equity is $250,000. This is the equivalent of a 50% loan to value ratio (LVR).

Your home equity increases as you pay off the loan, and the outstanding balance of your mortgage decreases. You can also build equity in your loan if the value of your home appreciates or increases. Or you can even renovate your property to add value.

Can I use my home equity to renovate?

Rather than dipping into your savings or taking out a second loan, you might be able to access the equity in your home by refinancing, to cover the cost of your renovations. If you’re considering refinancing, here are four factors to consider before you begin.

Before you start the refinancing process, it’s a good idea to map out your renovations and come up with an estimated budget. Some costs to consider include:

• Labour
• Permits
• Materials

Final cost might not match your estimation but getting a few quotes from tradies can help you on your way.

How can I use equity to fund my renovation?

There are two main ways you can access the equity in your home by refinancing - a cash out loan or a line of credit. Here’s a quick overview of how each of these refinancing options works.

Cash out loan

A cash out loan, also known as a home equity loan, is one way to access your home’s equity. In a nutshell, your lender will work out how much equity you can access depending on:

• Your intentions for the funds
• The current value of your property
• Your credit score and current financial status
• Your LVR
• The property market conditions

Based on the above factors, your lender will consider whether or not you can comfortably service this kind of loan. But remember, when you tap into your home’s equity, you’re essentially increasing the amount you owe on your home loan once more. Learn more about cash out loans and how it works here.

Line of credit

Another way to access the equity in your property is by using a line of credit. This type of loan offers a transaction facility, similar to a credit card, that can be used to access the equity in your home. That way, you can access the extra cash on an ‘as-needed’ basis rather than a lump sum.

Not all lenders offer a line of credit loan and the rates and fees will also differ depending on your lender. With that said the lenders that do offer a line of credit loan will often provide similar features with the loan, like ATM access and internet banking.

Points to consider before refinancing for a renovation

Refinancing your home loan can be a great way to fund your renovations, but it’s important to make sure it works for you. When it comes to renovating, there’s always a risk of overcapitalising if you invest more into the upgrades compared to the actual value that you add to the property.

It’s also worth noting that the more equity you tap into for your renovations, the more the amount owing on your mortgage will grow, impacting your LVR. This could result in an increase in your repayments or it could extend the life of your home loan itself, so it’s important to make sure you’re not financially overreaching. Plus, if you borrow over 90% of your LVR, you could be up for lender’s mortgage insurance (LMI) again too.

Don’t forget to consider the fees and charges that often come with refinancing your home loan. From exit costs to establishment fees and settlement costs, it’s worth running the numbers to figure out how much it could cost to access your equity.

Alternatives to funding your renovations

If you’ve decided that refinancing isn’t for you, that doesn’t mean that you won’t be able to renovate your home. There are other options out there, it just might take a little longer to get to the final outcome.

Construction loans

If you’re planning on carrying out a larger renovation that requires structural changes, or your budget is likely to come in over $250k, it could be worth considering a construction loan. This type of loan uses a payment schedule that aligns with specific stages of the renovation.

Build up your savings

Alternatively, if you’re not keen on dipping into your home equity, you might consider building up your savings to fund your renovations. Although this might be a little more time-consuming than refinancing to access your equity, you don’t risk increasing your debt. This can be a great option if you’re planning on splitting your renovations into stages, so you have time to save up for each stage. Plus, you might even decide to jump on the tools yourself and put your DIY skills to the test to save a bit of cash along the way. Just be sure to bring in the professionals when it comes to tasks like plumbing and electricity.

If you have access to a redraw facility with your current home loan, it could be worth making additional repayments to access later down the track. That way, you can withdraw these extra funds when you’ve built up enough cash to fund your renovations.

Refinancing your home loan to unlock your equity is one way to fund your renovations. Switch to low variable rates with Unloan. Decided renovations aren’t for you and it’s time to move to a new home? Some factors to consider if you’re deciding between renovating or moving to a new home here.

This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval, satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000, and total borrowings per customer across all Unloan loans is $10,000,000. (For purchase loans a minimum 10% equity is required - however a Lenders Mortgage Insurance (LMI) premium and higher interest rate apply. In some cases, depending on the property’s location or type, an LMI premium may also be required for LVR between 70.01% to 80%). For loans with Lenders Mortgage Insurance (LMI) the minimum loan amount is $10,000, maximum loan amount is $3,000,000 and total borrowings per customer across all Unloan loans is limited to $3,000,000).

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

*At Unloan, we do not charge any annual, application, banking, account, transaction, late or exit fees. In certain circumstances you may be required to pay a Lenders Mortgage Insurance (LMI) premium. Learn more about why this is applied and how it works. Government fees may also apply. Learn more about government fees here. Your current lender may charge an exit fee when refinancing.