Last Updated: 1st October, 2022

Financing Your Renovations

Published by Otto Dargan on June 2, 2014

Are you planning to renovate your property or are you planning to buy a renovator’s dream and give it a face lift?

Renovations can be challenging to finance and your budget can be hard to determine as unexpected costs arise!

What banks think about renovations

Banks don’t like taking a property as security that isn’t able to be rented out or sold in its current condition.

Properties that look like they have been hit by a cyclone are terrible for banks! They don’t care how much money you will make from renovating. They care how much risk they are taking and a rundown property is hard to sell.

In addition to this, if a property is partially renovated it can’t be sold easily either. Funnily enough, if you apply for a home loan when you have already started work then many lenders will decline your loan because they value a property as it is now, not as it will be. Ouch.

If you run out of money during renovations then it’s also a high risk to the bank, particularly if they haven’t inspected the work and don’t know if it was done well or not.

You can give us a call on 1300 889 743 or fill in our assessment form to find out how our mortgage brokers can help you to get approved.

How ambitious are your plans?

Minor cosmetic renovations that cost less than $20,000 are the most common. Maybe it’s just painting, new carpet, tiles and a quick fix up of the kitchen and bathroom. If you have spare cash or equity then these are easy to finance even if you aren’t using a builder.

If you are spending a lot of money and you don’t have much equity then you’ll need a licensed builder to complete the work and have a building contract in place. The banks will pay the builder in stages known as progress payments.

For major structural changes such as extending the property or knocking down walls, the banks may need to see council approved plans before approving your application. It really depends on the nature of the work you are doing.

Handy tip: banks don’t like to finance work that you are doing yourself unless you already have a lot of equity in your property. Sorry to all you DIY people who have been watching The Block!

Buying and renovating

What if you are buying a property and planning to renovate? Well, you’ve got a few options.

If it’s just a small DIY job and you don’t have much spare cash, then we often just apply for a small personal loan to cover the additional costs. Banks are happy to lend up to 95% or 105% with a guarantor, but if you need more a personal loan is the easiest option.

If you have a licensed builder then we can get you a loan for 95% of the purchase price plus cost of construction. If you have a guarantor then we can go to 105%. That means a personal loan isn’t necessary. The reason for this is that with a licensed builder on the job the banks are happy to rely on the on completion value rather than the current value of your property.

Renovating a property that you already own

If your property is worth a lot more than the amount that you owe on it then this should be relatively straightforward.

We can refinance your home loan and then release funds for you to get on with it. Some banks will want to control the funds while others will just put them in an offset account for you to manage.

If you don’t have a lot of equity then we have the same two options available for buying and renovating a property. If it is DIY, we have to rely on the current value. If you have a builder we can rely on then we can focus instead on the on-completion value.

Handy tip: we can arrange a free valuation from more than one bank which means we can apply with the one that can give you the best valuation. That’ll save you from paying Lenders Mortgage Insurance (LMI) or get you more money to play with.

How professional investors do renovations

Firstly, let me just say, that really serious investors often do property developments. I’m going to avoid that topic because it isn’t what most of you are after.

Investors that renovate houses or units typically focus on cosmetic renovations because they add more value while using up less time and money. It’s all about return on investment.

Structural changes are only attempted if there is a good reason to do so. For example, converting a double story house into a split level two dwelling complex will get a lot more rent so, sure, it is worth it.

Investors also keep funds on standby. Don’t run out of money during your renovations! That’s a guaranteed disaster.

Apply for a renovation loan

Our mortgage brokers know their stuff when it comes to financing renovations. In fact, many of them have done a few renovations themselves.

Give us a call on 1300 889 743 or fill in our free assessment form to find out how we can help.