How to finance an investment property renovation in Australia

Renovating an investment property can help attract quality tenants, improve rental returns, and potentially add value to your property. But before choosing paint colours or collecting quotes, it’s worth understanding how you’ll fund the project.

Many investors focus on the renovation itself and overlook the impact their funding choice can have on cash flow, borrowing capacity, and long-term costs. Several ways to finance a renovation exist, from accessing equity to topping up an existing home loan. Here’s what you should know before getting started.

Personal loan

Say you want to perform a few cosmetic enhancements. Nothing too major, just a paint job, maybe some new window dressings and/or flooring.

For a small project, a personal loan might be worth considering. Unsecured personal loans don’t use your property as security. Loan amounts and repayment terms are generally set at the time the loan is established.

However, interest rates are often higher than those on home loans, and loan terms are generally shorter. Repaying the loan within one to seven years could mean higher monthly bills.

Refinancing

If your property’s value has increased or you’ve paid down your mortgage somewhat, you may be able to refinance and use the equity to fund your renovation. Equity is the difference between the current market value of your property and what you owe on your mortgage.

This option offers lower interest rates than personal loans. If you’re undertaking a major renovation, refinancing could be worth exploring. Keep in mind, though, that you’ll be adding more debt to your mortgage.

Top-up loan

Another option is to top up your loan to fund your renovation. A top-up loan extends your existing mortgage, allowing you to borrow extra money without opening a whole new loan. Lenders usually add the new funds to your loan balance.

Like refinancing, this gives you access to lower interest rates than a personal loan or credit card. You will likely avoid setup fees that come with getting a new loan, and the approval process generally differs from a complete refinance.

Lenders will usually only let you borrow up to 80% of your property’s value. Exceeding that limit may trigger lenders’ mortgage insurance. Also, spreading the renovation cost over the life of the loan could mean paying more in interest over time.

Construction loan

For larger projects like structural changes to your property, a construction loan might be worth considering. With this type of finance, the lender releases money in stages as your builder reaches milestones.

Depending on the loan structure, you may only pay interest on funds already drawn. Many lenders offer interest-only payments, which could help you manage cash flow during the renovation. Interest rates can be slightly higher, and extra paperwork like building plans and contracts may be required.

Line of credit

A line of credit lets you access equity in your property and draw funds as needed, up to an approved limit. Because you access money when required rather than all at once, some investors use it to help fund renovation projects.

Interest is generally charged only on the amount you’ve drawn, not the full credit limit. However, the facility is secured against your property, so borrowing responsibly is essential. If you can’t meet your loan obligations, your property could be at risk.

Use existing funds

If you have savings or you’ve been putting extra money into an offset account or redraw facility, you might decide to use those funds for your renovation.

Just remember it’s always a good idea to keep a little money aside for cost overruns.

Ready to chat about your finance?

Renovating can be exciting, but understanding your finance options before committing to a project is important.

Reach out if you’d like to discuss your circumstances and explore the finance options that might be available to you.