Top Tips to Refinance and Use Home Equity to Renovate

Your renovation budget may be partly sitting inside your home, subject to lender approval.

Refinancing to release equity can let you borrow against the part of your property you already own. The amount you can access matters, but so does the way the new debt is structured.

How Much Usable Equity Do You Have for a Renovation?

Usable equity is the lender's valuation of your property, multiplied by the maximum loan to value ratio (LVR) that lender allows, minus what you still owe. The valuation and the maximum LVR both vary between lenders, so the figure you work out yourself is only a starting estimate. The amount a lender will actually release also depends on its approval, its valuation, and your income, expenses and other debts. Borrowing above 80% LVR may involve lenders mortgage insurance (LMI) or tighter policy.

A lender's valuer decides the property value, not an online estimate or a neighbour's sale. Different lenders apply different LVR limits depending on factors such as loan size, loan purpose and property type. Your income and expenses then affect how much you can borrow under the serviceability test. A mortgage broker can compare several lenders' policies and LVR limits before you apply. The lender's valuation can still come in lower than you hoped, which would reduce the equity available.

Should You Refinance or Top Up Your Current Loan?

A top up loan with your current lender suits a smaller job where you are happy with your existing rate and features. Refinancing your home loan suits cases where you want the extra funds and a full review of the loan at the same time.

The trade-off is cost and effort. Moving lenders can involve discharge fees, application fees and a full credit assessment, so you need to weigh these against any rate or feature gains. Staying put is quicker, but your lender has little reason to improve your terms. A loan health check shows where your current loan sits before you decide, and our refinancing team can price both paths side by side.

Renovation Example: A $60,000 Kitchen and Bathroom Upgrade

Borrowing $60,000 for a renovation and placing it in a separate loan split keeps the cost visible and gives you control over how fast you repay it. The figures below are illustrative only.

Consider a homeowner with 25 years left on their loan. They want to renovate a kitchen and bathroom and have quotes totalling $60,000. Their lender's valuation leaves enough usable equity to cover it, and the lender approves the borrowing after assessing their income, expenses and other debts. They refinance and release that amount as its own split, with the original balance staying in the main loan.

At the illustrative rate of 6.75% p.a., repaying that $60,000 over the remaining 25 years costs about $415 a month. They check this against their budget before signing. Because the renovation sits in its own split, they can direct extra repayments at it first, and they can see exactly what the work costs them each month.

The cost of this approach is more interest over time than if they paid cash. The renovation also may not add value equal to what it cost. Use a refinance calculator to test your own numbers at different rates and terms.

What Are the Risks of Borrowing Against Your Home Equity?

The main risk is that you increase your debt against a property whose value can move up or down. If the value falls or your income changes, a higher loan balance leaves you with less room to adjust.

A few habits reduce that risk. Borrow for the work you have quoted, not for a round number that includes extras. Keep a buffer for cost overruns so you are not tempted to go back for a second top up. Check that your budget still works if repayments rise, since lenders can change variable rates. For a long-term investor, equity is a tool to be spent where it builds value, not a source of spare cash.

Renovating an Investment Property With Released Equity

If the renovation is on an investment property, the way you use and structure the borrowing can affect how the interest is treated for tax. Speak to your accountant before you set up the loan, because tax outcomes depend on your own circumstances.

Keeping borrowing for different purposes in separate splits generally makes your records cleaner. For example, funds used on the rental property sit apart from funds used on a personal expense. If you hold several properties, our investment loans team can look at how the released equity fits across the whole portfolio, not just one loan.

How Does Releasing Equity Affect Your Borrowing Capacity?

Additional borrowing increases your debts, which usually reduces how much you can borrow for future purchases. If you plan to buy another property soon, work out the order of events before you refinance.

A renovation can be a sound step before a purchase or a barrier to one, depending on timing. Checking your borrowing capacity with and without the new loan shows the real effect. If your longer-term goal is growing a portfolio, it helps to map the renovation against your plans for expanding your property portfolio so each move supports the next.

If you are weighing up a renovation funded by your equity, call one of our team or book an appointment at a time that works for you. We will map out your estimated usable equity, compare lenders and build a structure that supports your long-term wealth plan.

Frequently Asked Questions