Want to upgrade? How home renovation loans work

Australians love investing in property. It's typically the largest investment you’ll make in your lifetime, so when it comes time to upgrade your home, there are a range of options out there which could help you access the funds you may need.

Whether you’re looking to upgrade your home for resale or simply making those renovations to better suit your lifestyle, personal loans for home renovation could be an option.

Before you apply for a home improvement loan, here are a few things to consider.

A home renovation or home improvement loan is a type of personal loan you can use to pay for all or a portion of a home renovation project or upgrade, allowing you to spread out the cost over your loan term. This could help you to fast track the work by making regular payments within your buget.

You might choose to use a personal loan for your renovations, but there are a variety of other options to consider.

There are a number of home renovation loans you can apply for. These include personal loans, construction home loans and refinancing your existing mortgage.

While there are several ways to finance your home renovations, the most suitable option for you would depend on your circumstances and the scale and type of improvements you want to make. The loan options might include the following:

An unsecured personal loan allows you to borrow money without needing an asset as security. In some cases these loans may have higher interest rates and fees than a secured loan. Loan terms can range over a year to a few years and will usually be offered with a fixed or variable interest rate. Depending on your credit rating and the strength of your application, some lenders may adjust interest rate based on your circumstances.

Secured personal loans can also be used for home improvements and should you choose, you may be able to use your home as security. Alternatively, if you have a mortgage and equity in your home that’s greater than the amount you’re looking to borrow, you some lenders may allow you to use that equity as security.

In some cases, a secured home loan may offer greater borrowing limits, however, this does depend on the value of your asset. Interest rates on secured personal loans may also be lower as the loan is often considered lower risk to the lender.

If you’re considering sustainability improvements that make your home more eco-friendly such as solar power or solar hot water systems, double glazing for windows, water tanks and grey water systems, there may be green loan options designed for this purpose which may be a consideration.

Geen loan may have restrictions in terms of how you spend the funds as these improvements usually need to be for the sake of making your home more environmentally friendly.

Green loans usually include either secured or unsecured options and have varying loan repayment terms depending on the lender you choose. Borrowing limits may also be varied depending on the specific green upgrade you're undertaking.

A construction loan disperses payment to you in instalments rather than a one-off lump sum payment. These are typically designed for large renovation projects such as knock-down rebuilds, adding an additional storey or an extension to your home.

Construction loans are typically given based on the post-renovation final value of your property so you can withdraw a specific amount to pay invoices as they arrive throughout the entire construction process.

In some cases, there may be interest-only options for a short period of time before they revert to a principal and interest style loan. Depending on your lender, you might be able to refinance your existing home loan to a construction loan.

A repayment schedule is set up by your lender and the amount you borrow is fixed, but you’ll receive the funds in instalments based on the construction contract and agreement with the lender.

This option may suit you if you already have a mortgage and can refinance, making finds available to use on your renovation project. Talk to a professional and get advice from your current lender to find out more. Alternatively, you can compare a range of other lenders to see if a better deal is out there.

Just as you would with any loan product, it’s important to compare and research lending options by reading the lending terms and contract to fully understand any fees or charges that might be associated with the loan before applying.

In some ways, refinancing is a similar process to taking out a brand new home loan, so it’s vital to understand all the implications it may have on your greater financial wellbeing before committing.

Home improvement loans can be used for a variety of renovations or upgrades to your home including a kitchen or bathroom, common general fixes such as repairs, roofing, new exteriors, adding an extension, an outdoor entraining area or a swimming pool.

You can also use a home renovation loan to add eco-friendly or energy-efficient additions to your home such as water tanks, solar panels, insulation and the like.

It’s always best to have a clear idea of your renovation and a budget for your project before you begin applying for any extra finance.

As you would with any loan consideration, it’s important to be confident that you can afford repayments. Calculate the cost of a home improvement loan, by looking at the interest rate, fees, features and the comparison rate which includes most additional fees and charges associated with the loan. Doing so will give you a better indication of the true cost of the loan, helping you to decide if it’s right for you.

You should also consider the loan term and repayment frequency as well as the loan flexibility in terms of whether or not your lender allows for additional repayments to be made. Some loans will allow borrowers to make extra payments when they can, which shortens the life of the loan, without penalty.

It’s important to also have a clear idea of your project and an accurate estimate of costs so that you don’t overborrow (or under borrow). Borrowing too much could cost you more in repayments but running out of cash can leave you stuck mid-project.

Consider the repayments and how they might affect your cash flow. It’s also worth looking at any additional features such as extra repayments, offset accounts and redraw options and whether these come with any additional fees.

As with all loans, it’s important to read all the terms and conditions before you apply, along with the loan offer and contract, to ensure you have as much information as possible to make an informed decision.