Renovation loans finance home improvements, extensions, and major renovations. Whether you're updating a kitchen, adding a second story, or doing a complete renovation, this guide covers all your financing options.
What is a Renovation Loan?
Renovation loans fund home improvements on existing properties:
Common renovations financed: ✅ Kitchen and bathroom renovations ✅ Home extensions and additions ✅ Second story additions ✅ Complete house renovations ✅ Granny flats and studios ✅ Pool installations ✅ Deck and outdoor areas ✅ Internal reconfiguration
How they work:
- Borrow based on 'end value' (after renovation)
- Funds released in stages as work completes
- Similar to construction loans but for existing home
- Can combine with purchase or refinance
Types of Renovation Finance
1. Purchase + Renovation Loan
Buy a home and renovate in one loan:
How it works:
- Single loan covers purchase + renovation
- Buy the property
- Renovate over 6-12 months
- One approval, one settlement
Advantages: ✅ Single application ✅ Borrow based on renovated value ✅ Higher LVR possible ✅ Streamlined process
Example:
- Purchase price: $600,000
- Renovation cost: $150,000
- End value (renovated): $850,000
- Borrow 80% of $850k = $680,000
- Deposit needed: $70,000 (balance from loan)
Best for: Buying a fixer-upper
2. Refinance + Renovation Loan
Refinance existing home and access equity for reno:
How it works:
- Current home: Owned with equity
- Refinance based on end value
- Release equity for renovation
- Complete reno over 6-12 months
Example:
- Current value: $700,000
- Current loan: $400,000
- Renovation cost: $120,000
- End value: $850,000
- Refinance to 80% of $850k = $680,000
- Release: $280,000 for renovation
Best for: Current homeowners wanting to renovate
3. Construction Loan (Renovation)
Dedicated renovation loan with progress draws:
How it works:
- Detailed scope of works and quotes
- Lender approves renovation budget
- Funds released in stages (like construction)
- Pay interest only during renovation
Typical stages:
- Stage 1: Demolition/Strip out (10-15%)
- Stage 2: Structure/Frame (25-30%)
- Stage 3: Lock-up (40-50%)
- Stage 4: Fix-out (70-80%)
- Stage 5: Completion (100%)
Best for: Major renovations, extensions, second stories
4. Personal Loan or Line of Credit
For smaller renovations:
How it works:
- Borrow fixed amount upfront
- No progress draws needed
- Fixed term (3-7 years)
- Higher rates but simpler
Best for: Smaller projects under $50,000
Renovation Loan Rates & Costs 2025
Interest rates similar to standard home loans:
Bank renovation loans:
- Owner-occupied: 6.0-7.5% p.a.
- Investment: 6.5-8.0% p.a.
- Same as standard variable/fixed home loan rates
Private renovation loans:
- Standard: 8-12% p.a.
- Quick approval: 10-15% p.a.
During renovation:
- Interest-only on drawn amount
- Only pay interest on funds released
- Lower payments during construction
After renovation:
- Convert to principal + interest
- Standard home loan repayments
- 25-30 year term
Fees:
- Application: $0-$800
- Valuation: $300-$800 (standard) or $800-$2,000 (progress valuations)
- Progress inspection: $200-$400 per draw (4-6 draws typical)
How Renovation Loans Work
Borrowing Capacity
Based on END VALUE, not current value:
This is powerful:
Example:
- Current value: $650,000
- Current loan: $450,000
- Equity: $200,000
- Renovation: $100,000
- End value: $800,000
Standard equity loan:
- 80% of current = $520,000
- Less existing loan = $70,000 available
- Not enough for $100k renovation
Renovation loan:
- 80% of END value = $640,000
- Less existing loan = $190,000 available
- More than enough for $100k renovation ✅
Progress Payment Structure
Funds released as work completes:
Example $120,000 renovation:
Pre-renovation:
- Get builder quotes
- Detailed scope of works
- Fixed price contract preferred
Stage 1: Demolition & Strip (15%)
- Demo old kitchen/bathroom
- Strip walls, prepare
- Draw: $18,000
Stage 2: Structural (30%)
- New walls, structural work
- Plumbing/electrical rough-in
- Draw: $18,000 (total $36k)
Stage 3: Lock-up (55%)
- Windows, doors
- Roof work (if applicable)
- Draw: $30,000 (total $66k)
Stage 4: Fixing (80%)
- Kitchen installation
- Bathroom fit-out
- Flooring, painting
- Draw: $30,000 (total $96k)
Stage 5: Completion (100%)
- Final finishes
- Completion certificate
- Final draw: $24,000 (total $120k)
Each draw requires:
- Builder progress claim
- Bank/QS inspection (3-5 days)
- Invoice verification
- Fund release (5-10 days)
Valuation Process
Two valuations usually required:
1. Current Value (As-Is)
- Property in current state
- What it's worth today
- Before renovation
2. End Value (As-If-Complete)
- Based on plans and specs
- What it will be worth after reno
- Valuer reviews plans, comparable sales
- This determines maximum loan
Example:
- Current value: $700,000
- End value: $900,000
- Can borrow up to 80% of $900k = $720k
Bank vs Private Renovation Loans
Bank Renovation Loans
Advantages: ✅ Best rates (6-8% p.a.) ✅ Higher LVRs (up to 95% with LMI) ✅ Longer terms (25-30 years) ✅ Established processes
Requirements: Good credit score Stable income/employment Detailed renovation plans Fixed-price builder contract (preferred) Registered builder (usually required) 3-6 weeks approval time
Best for:
- Major renovations with plans
- Using licensed builders
- Strong financials
- Want lowest cost
Private Renovation Lenders
Advantages: ✅ Fast approval (1-2 weeks) ✅ Flexible criteria ✅ Owner-builders accepted ✅ Credit issues OK ✅ No detailed plans required (sometimes)
Trade-offs: **Higher rates (8-15% p.a.) **Lower LVRs (70-80%) **Shorter initial terms **Higher fees
Best for:
- Quick start needed
- Owner-builder renovations
- Credit issues
- Unique/complex renovations
- Banks declined
Owner-Builder Renovations
Doing some/all work yourself:
Bank Criteria
Most banks won't lend to full owner-builders, but:
Some banks accept if: ✅ Licensed trades for specialized (electrical, plumbing, gas) ✅ You have building experience/qualification ✅ Detailed costings and timeline ✅ Builder's warranty insurance ✅ Lower LVR (70-80%)
Typically require:
- Quantity surveyor report
- Detailed scope of works
- All permits approved
- Insurance in place
Private Lenders
Much more flexible:
- Accept owner-builders readily
- Don't require building qualifications
- Focus on end value
- May require some licensed work
Typical requirements: ✅ Clear renovation plan ✅ Realistic costings ✅ Some building knowledge ✅ Licensed trades for electrical/plumbing/gas ✅ 20-30% equity
Renovation Loan Requirements
What you'll need:
Property Documents
For the property: ✅ Current title ✅ Current mortgage details (if refinancing) ✅ Council approved plans (for major work) ✅ Building permit (if required) ✅ Engineering reports (if structural)
For the renovation: ✅ Detailed scope of works ✅ Architectural plans/drawings ✅ Builder's quote (fixed price preferred) ✅ Building contract signed ✅ Specifications and finishes schedule
Valuation documents: ✅ Photos of current state ✅ Plans showing finished state ✅ Comparable sales (renovated)
Financial Documents
Standard requirements: ✅ Payslips or financials (self-employed) ✅ Tax returns (2 years) ✅ Bank statements (3-6 months) ✅ Asset/liability statement ✅ Proof of deposit/equity
Builder Requirements
If using a builder: ✅ Builder registration/license ✅ Home warranty insurance ✅ Public liability insurance ✅ Fixed price contract signed ✅ References/past work
Renovation Costs to Factor In
Budget beyond the builder quote:
Building work:
- Main contract: $100,000-$500,000+
- Variations: Add 10-15% buffer
Professional fees:
- Architect/designer: $5,000-$30,000
- Engineer: $2,000-$10,000
- Certifier: $2,000-$5,000
- Council fees: $2,000-$8,000
Financing costs:
- Valuation: $800-$2,000
- Application fees: $0-$800
- Progress inspection fees: $200 x 5 = $1,000
- Interest during reno: $3,000-$8,000
Unexpected:
- Asbestos removal: $5,000-$20,000 (if found)
- Structural issues: $5,000-$50,000
- Underground services: $2,000-$10,000
- Termite damage: $5,000-$30,000
Living costs during renovation:
- Temporary accommodation: $1,500-$3,000/month
- Storage: $200-$500/month
- Eating out (no kitchen): $500-$1,500/month
Always add 15-20% contingency to total budget
Interest During Renovation
Plan for interest payments while renovating:
Example $150,000 renovation @ 7% p.a.:
Month 1-2: $30k drawn = $175/month Month 3-4: $60k drawn = $350/month Month 5-7: $90k drawn = $525/month Month 8-10: $120k drawn = $700/month Month 11-12: $150k drawn = $875/month
Average during reno: ~$500/month Total interest paid (12 months): ~$6,000
Plus existing mortgage:
- Existing $500k mortgage: $2,917/month
- Plus renovation interest: $500/month
- Total during reno: $3,417/month
After completion:
- Total loan: $650k
- P&I repayment: $4,382/month
Common Renovation Loan Mistakes
1. Underestimating Total Costs
Got quote for $100k Forgot fees, contingency, interest Ran out of money at 80% complete
✅ Solution: Add 20% to all quotes, budget for everything
2. No Contingency Fund
Budget exactly matched loan Found asbestos, needed $15k extra Had to stop work
✅ Solution: Keep $20-30k cash reserve separate
3. Unrealistic Timeline
Builder said 12 weeks Actually took 26 weeks Double the interest and accommodation costs
✅ Solution: Add 50% to builder timeline
4. Living On-Site During Major Reno
Thought they could live through it No kitchen, bathroom, dust everywhere Relationship stress
✅ Solution: Move out for major renovations
5. No Fixed Price Contract
Hourly rate arrangement Costs blew out 40% Lender wouldn't release extra
✅ Solution: Fixed price contract always
Tips for Renovation Loan Success
Before you start:
- Get 3 quotes - Compare builders thoroughly
- Detailed plans - Know exactly what you're building
- Right budget - Add 20% contingency
- Pre-approval first - Secure finance before committing
- Timeline buffer - Add 50% to builder estimate
During approval: 6. Fixed price contract - Lenders prefer this 7. Licensed builder - Makes approval easier 8. Clear drawings - For valuer to assess 9. Evidence of equity - Recent sales/valuations 10. Explain value-add - Show how reno adds value
During renovation: 11. Good project management - Stay on top of builder 12. Document everything - Photos at each stage 13. Plan draw timing - Don't let builder get ahead of payments 14. Manage variations - Approve costs before work 15. Regular inspections - Catch issues early
Value-Add Renovations
Maximize your investment:
High-Return Renovations
Best ROI (return on investment):
1. Kitchen renovation
- Cost: $20,000-$50,000
- Value add: $30,000-$70,000
- ROI: 120-140%
2. Bathroom renovation
- Cost: $15,000-$35,000
- Value add: $20,000-$45,000
- ROI: 115-130%
3. Adding a bedroom
- Cost: $40,000-$80,000
- Value add: $60,000-$120,000
- ROI: 130-150%
4. Second bathroom
- Cost: $25,000-$45,000
- Value add: $40,000-$70,000
- ROI: 140-160%
5. Cosmetic refresh
- Cost: $15,000-$30,000
- Value add: $30,000-$60,000
- ROI: 150-200%
Renovations to Avoid
Poor ROI:
Pool: Cost $40-80k, adds $20-40k (50% ROI) Over-renovating for area: $200k reno in $500k suburb Very personal taste: Ultra-modern in traditional area Gym/games room: Better as extra bedroom
Need Renovation Finance?
Planning a home renovation?
We can help connect you with renovation loan specialists who understand home improvements and can structure the right loan for your project.
Get connected with renovation loan lenders →
Fast assessment, competitive rates, experienced renovation finance team.