Refinancing to Renovate: What you need to know

As property prices continue to soar, many Australians are left with the decision whether to renovate their current home, or move to a new property. Renovating your existing home can give you the fresh start you crave without the need to move. If you’ve got equity in your property, a renovation could be more achievable than you think.

How does refinancing work

Refinancing essentially means taking out a new mortgage to replace your existing loan. Doing so can allow you to access a lower interest rate, and release equity you’ve built up in your property as its value has increased.

Using refinancing to renovate

If you’re looking to renovate your home to meet the needs of your changing lifestyle, refinancing can unlock the equity you need to make it happen. If you own a property worth $1million and you’ve got $400,000 worth of equity, you could refinance to release some of that $400,000 to fund your renovation – and even increase the value of your property in the process.

As a general rule of thumb, usable equity is calculated by taking 80% of your property’s value minus the outstanding balance on your existing loan. This helps to avoid overcapitalisation and prevents you from having to take out additional mortgage insurance.

What you need to refinance

When refinancing to fund a renovation, the documentation you’ll need depends on the lender, your property, and what your renovation involves. Any changes that require council approval, including the instalment of a pool, need to have the relevant proof of approval before you can apply to refinance. In addition, you may be asked to provide formal quotes from providers and submit invoices relating to your renovation project.

Simpler renovations that don’t involve structural change to the property – a bathroom or kitchen makeover, for example – can often be assessed using a desktop valuation, without the need for council documentation or quotes.

Benefits of refinancing to renovate

Refinancing to renovate can unlock equity in your home, meaning your home improvements don’t need to eat into your personal savings. Plus, using equity to carry out renovations can be financially beneficial if the improvements increase the resale value of your property. Refinancing can also mean securing a lower interest rate on your loan, making your monthly repayments more manageable.

Things to consider when refinancing for a renovation

Refinancing to renovate isn’t right for everyone. It’s important to consider your long-term plans and whether you intend to sell the property in the near future. This helps you avoid overcapitalisation. If you spend more on the renovation than you’re adding in value to the property, you could face issues when you come to sell.

Refinancing can extend the lifetime of your loan or increase the repayments you’re making now, so it’s important to make sure not overstretching your financial capacity. Weigh up the number of years left on your loan with the age you plan to retire and ensure you’ve enough working years left to pay down the loan in full.

Alternatives to refinancing

Refinancing isn’t always the best way to fund your renovation. Alternatives include:

• Looking into payment plans with the supplier of the works being done
•  Saving up in advance
•  Taking out a personal loan

It’s important to weigh up the cost of your renovation against interest rates, as well as the time you anticipate it will take you to pay it back.