Key takeaways.
- Refinancing to renovate allows you to borrow against the equity in your home.
- It can be more cost-effective than using personal loans or credit cards, as home loan rates are typically lower.
- When you refinance, your new loan pays out the old one and provides additional funds you can use directly for your renovation project.
- This approach can create a positive cycle – renovations often increase property value, which in turn builds more equity in your home.
- Refinancing can also help align your loan with your current goals, lifestyle and property plans, ensuring your home loan supports your renovation ambitions.
- Banks and lenders can streamline the process by handling the transfer of your old loan, making refinancing for renovation a practical, low-stress option.
- Before proceeding, confirm that your renovation budget and expected property value increase make refinancing worthwhile.
Planning a home renovation is an exciting time. Who doesn’t love a deep dive into Architectural Digest’s Open Door series or a hedonistic scroll through Pinterest? However, the finance side of renovating can be a lot less fun. That’s where we can help. Having a plan to refinance and renovate can not only help you get that dream space, but also a better deal on your home loan.
What is refinancing?
Refinancing is a financial strategy that basically means replacing your current home loan with a new, improved one. This is usually done when your circumstances or goals change – when you need extra cash for a home reno, for example. Switching to a new loan gives you the chance to find one that’s better suited to your current needs.
Refinancing can bring a bunch of benefits, such as allowing you to access the equity in your home (hello, reno fund), secure a lower interest rate, score extra features like redraw and consolidate other debts.
Whether you’re planning a simple cosmetic upgrade on the family digs or a major home transformation on your investment property, refinancing could be the way to get there.
Why refinance and renovate?
Tap into your home equity.
Home equity is the difference between the current market value of your home and how much you still owe on your loan. Think of it as the part of your property that you’ve paid off. If you’ve been dutifully shelling out loan repayments and/or your property has risen in value, you’ll likely have some equity to play with.
General manager of home buying for ME, James Sheffield, says that using equity to renovate can be more cost-effective and efficient than the alternatives, such as using a personal loan or waiting until you’ve saved up. ‘Unlocking home equity is one of the best ways to fund a renovation,’ he says.
If you choose to refinance and renovate, your new loan will pay off the old balance and give you the leftover cash. You can then use this equity to pay for your home improvements. In an interconnected circle-of-life moment Mufasa would be proud of, it’s likely your reno will increase the value of your home, which will then raise your home equity once again.
Secure a lower interest rate.
Home loans were never meant to be a set-and-forget product. If you’re not reviewing yours regularly, then you’re probably leaving money on the table. Shop around for a loan that offers a lower interest rate – your future self will thank you for it. (Probably while chilling on the luxe deck you renovated, thanks to those saved funds.)
A lower interest rate will mean you can channel more money into your home improvements. To get an idea of how much you could be saving, get tap-happy on our refinance calculator. You can compare home loan products to find the best for your needs.
Get extra loan features.
Refinancing allows you to choose a loan with features you want and shed the ones you don’t need. There are even loan features that help you while you save for your home improvements.
A redraw facility allows you to make extra repayments to reduce your loan principal, which reduces the amount of interest you pay. Then when you’re ready to complete your reno, you can redraw the extra money.
It’s a clever way to make your money work for you while you save. The offset feature offers similar benefits. By parking funds in an offset account, you’ll reduce the interest paid on your loan until you need to withdraw it for your renovation. And if you’re banking with ME, your offset account will benefit much more than just your home.
Redraw and offset are typically only available on variable rate home loans. If you’re concerned about rising interest rates, then splitting your loan could be a wise strategy. ‘Sometimes it's better to have the best of both worlds by splitting the loan and having an element of the loan fixed and an element of the loan variable, because then you're effectively hedging your bets,’ says James.
Consolidate your debts.
It can be challenging to finance home improvements if you have a personal loan or credit card debt draining your funds. If you choose to refinance your mortgage to renovate, it will also give you the chance to consolidate your debts into one manageable repayment. This could bring you one step closer to that glossy marble benchtop or new swimming pool.
‘Generally, personal loans and credit card debts have high interest rates, whereas home loans have lower rates,’ explains James. ‘So, you could cut your interest payments down if you consolidate your higher-interest debts. You might end up paying your debts off faster because you’ll be paying the debt down rather than only paying the interest.’
Keep in mind that your equity and loan-to-value ratio will influence your ability to consolidate your debts, as well as refinance and renovate. And of course, there’s no point doing this if you keep accruing new debts. Make sure you close your personal loans and credit card accounts after you consolidate them.
Refinance for renovation – is it right for you?
If you’re keen to refinance your home loan for renovations, speak to your bank, broker or financial adviser about whether this option suits your circumstances. Be aware there are fees attached, so ensure the benefits outweigh the costs.
Importantly, make sure you’ve correctly estimated your reno costs and do some research to ensure your planned renovation will increase your property’s value.
Some borrowers avoid refinancing for renovations because they worry there’s a lot of paperwork and red tape. But banks like ME can do a lot of the work for you. We deal with your old bank directly and transfer the titles and security – no awkward bank breakups here. You simply need to do the prep work and stay patient through the refinancing process.
Of course, deciding to refinance your home loan isn’t the only way to pay for renovations. There are other options available, such as topping up your home loan or taking out a construction loan or home renovation loan (also known as a home improvement loan), which is a personal loan for renovation. Keep in mind that a house renovation loan often has high interest rates.
If you’d like to refinance and renovate, we’d love to help.
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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.