Choosing a renovation loan

How do you fund a cosmetic renovation under $50K?

Paint, flooring, kitchen handles, lighting, works that don't require a builder's licence or council approval. The cleanest funding path is usually a top-up on your existing home loan (if you have equity) or a redraw if the funds are sitting there. No special construction-loan structure needed.

How do you fund a structural renovation between $50K and $300K?

Kitchen replacement, new bathroom, deck addition, internal restructure. These need a licensed builder and usually a fixed-price contract. You can fund via equity release if you have it; otherwise a construction loan works but adds complexity.

Construction loans pay the builder in stages (slab, frame, lock-up, fixing, completion) against progress invoices. Interest is charged only on the funds drawn. Your monthly payments are interest-only during construction, then convert to P&I on completion.

Lender risk weights on development lending also feed into the rate and serviceability outcome; see our coverage of APRA's proposed risk-weight cuts for residential development loans.

How do you fund a knock-down rebuild or major addition over $300K?

Full construction loan with stage payments. Council approval (DA) plus building contract required. Most lenders also want a fixed-price contract, variable contracts are scrutinised. The valuer assesses the "as if complete" value to confirm the end LVR makes sense.

Compliance costs baked into the building code are part of why a knock-down rebuild costs what it does; see our coverage of a proposal to ease building-code requirements.

Budget 15-20% contingency on top of the contract sum. Variations (the "while we're at it" additions) routinely blow contracts by that amount.

How much can you borrow to renovate?

For an equity-funded reno, the ceiling is your useable equity: most lenders let you borrow up to 80% of the property's current value minus your existing loan. On an $850,000 home with a $480,000 loan, that is roughly $200,000 of useable equity before Lenders Mortgage Insurance comes into play.

For a construction-loan reno, the lender lends against the "as if complete" valuation, the projected value once the works are done, so a well-chosen renovation that adds more value than it costs can expand what you can borrow. Either way you still have to service the larger loan, so borrowing capacity, not just equity, sets the real limit. Check both with the borrowing power calculator before you commit to a scope.

A renovation that adds less value than it costs still has to be repaid in full, so weigh the borrow against the likely value uplift, not just what the bank will lend.

Does a dedicated construction loan actually cost more than an equity top-up?

On today's verified owner-occupier variable panel at 80% LVR (20 October 2026), the lowest standard rate, the one an equity top-up or redraw draws on, is Bank of China at 6.18% p.a. The lowest dedicated construction-loan rate on the same verified panel is The Mac at 5.92% p.a., actually 0.26 percentage points cheaper for the staged-drawdown structure. Which path actually suits your reno still comes down to whether you have the useable equity, not the rate alone.