Choosing a renovation loan

Cosmetic renovations (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.

Structural renovations ($50K-$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.

Knock-down rebuild or major addition (>$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.

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.

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