Finance Advice

JULY 08, 2021

What Type of Loan is Best for Home Improvements in 2021?

Australia’s renovation market has powered ahead over the last two years.

With many restricted to their homes since the pandemic, the option of staying put and renovating became more preferable than packing and moving.

Except the idea of home improvements are challenged by budget for most people.

Whether it’s a few finishing touches, repairs or a complete turnaround, renovations are important for maximising the value and longevity of any house. They just don’t always come cheap.

One of the biggest money motivators for upgrades is government grants. As households inject fewer funds into travel, some are also using extra savings or home loan redraws. The good news is, there’s more than one way to finance your home improvement.

Try these tips to find the right option for you.

Home Improvement vs Building and Construction Loan

What type of renovation are you planning?

If it’s non-structural upgrades, a home improvement loan can suit minor improvements and renovation budgets up to $30k that don’t need a builder. However, major renovations like floor plan changes or a new kitchen and bathroom are better funded with a building and construction loan (BICOE). These loans are designed for homeowners building a new home or structure with a licensed builder and can cater to budgets over $100k.

While home improvement loans give you one lump payment, BICOE works through increments. You pay each bill as it’s invoiced and as such, avoid paying immediate interest on the building costs.

The downfall with BICOE is, the more you draw from your loan the more the interest increases which you’ll need to budget for. The draw process also makes it a complicated option compared to home improvement loans.

Both types have their pros and cons. Before you choose, weigh up:

  • Renovation type
  • Total renovation costs
  • Interest rates
  • Closing costs (often higher with building and construction loans)
  • Loan and repayment terms
  • Terms and conditions involved – for eg: construction loans require regular valuations and don’t usually permit DIY home improvements

Home Equity Loan

Home equity loans allow you to spread renovation costs over a longer time. For established homes, you can borrow up to 90% of your home’s value. But if the upgrades cost more than the equity in your home, this is where things can get messy if you run out of money.

This finance type can be useful if you’ve been making extra repayments on your loan. To access equity, you must apply for a loan increase. Using the equity in your home is one of the fastest and easiest ways to fund renovations. However, you’ll need to speak to your mortgage provider to review your specific situation, as well as the equity in your home.

Remember if you choose this option, the balance on your home loan increases. So will the interest and repayments.

Research Available Grants

There’s further financial support from the government if you need an extra boost.

HomeBuilder packages are for new builds and substantial renovations. Eligible homeowners receive up to $25k, but you’ll need to invest at least $150k of your money into the upgrades too. Grants are means-tested and requirements can vary between states.

Read about what grants you could be eligible for.

Have a Contingency Plan

Most renovators fail to plan for delays or complications. Break down the scope of your renovation, materials, timeline and costs to avoid the common pitfalls of renovating.

Key takeaways:

  • Secure finance first
  • Create a master plan before you start
  • Use a project manager if you’re planning major or structural upgrades
  • Seek professional advice
  • Use budget calculators to work out costs and have a 20% emergency buffer
  • As a rule of thumb, spend around 2% of the overall property value on any one room
  • Budget for building insurance
  • Invest in renovations that add value to your home



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