Building or renovating a property is a great way to get the home you want, or improve cash flow on a rental, but unless you’ve got a bunch of cash in the bank to fund your renovations, you are going to need renovation or construction finance. There are several different ways you can fund property renovations, and we have already covered the best tip we have overall is making sure you plan and have a good understanding of the costs before you start ripping down walls and applying for finance. Let’s face it, without the cash you can’t do much – so after 10 years of experience in the finance industry (and having seen some shockers!) here is an overview of renovation home loans, and some tips to finance property renovations.
Details in brief
- It is possible to borrow up to 95%, or even 100% of renovation costs.
- In most cases you may qualify for larger interest rate discounts with increased lending.
- Not all lenders do renovation or construction loans, so don’t risk being declined by your bank.
- It is imperative you present your case well to the bank. Are you putting your best foot forward?
How much will the banks lend?
Due to the specialised nature of property renovations and improvements, not all banks and building societies will provide lending towards them. There are some banks that have a blanket ban against construction lending because they consider it higher risk lending when compared to a standard refinance. Otherwise, they limit the amount they will lend towards construction so it is important you work with a mortgage broker that deals with multiple banks and understands their different policies and nuances.
In some cases, it is possible to lend up to 100% of the renovation costs, provided the property can be rented and there is a functioning kitchen and bathroom. These renovations are generally non-structural, like adding air-conditioning, getting a pool or basic kitchen update. If you have hired a contract builder or you’re doing some major structural renovations you may be able to borrow up to 95% of the total costs; however, if the property is in poor condition or structurally unsound, your lending may be restricted as the banks consider this higher risk
Can I fund using equity in my home?
Yes you can increase your existing loan, top up or refinance utilising existing equity in your property. This can be on your home or investment property provided it is rentable and has a functioning kitchen and bathroom. Most banks will lend up to 80% ‘cash out’ without providing receipts or quotes on the work to be completed, and over 80% of lenders will lend up to 95% but you would need to provide receipts or quotes for the scope of work to be completed.
Why are most banks really conservative with renovations?
A lot of the banks have seen the risks of renovating properties and what happens when things go wrong. For example, when a licensed builder isn’t used or when they go bankrupt half way through construction which does happen. This is why most banks will decline your application if you are not using a licensed builder – an easy way to check is to get your builders licence number, and contact your local Master Builders Association.
Further to this, it is extremely difficult to sell a property that is missing a kitchen, incomplete or that requires major repairs. So should something go wrong half way through a renovation, it is significantly higher risk to the lender to sell in the event you cannot make repayments on your loan.
Do lenders prefer contract or owner builders?
Again the lenders can be fairly conservative around renovation and construction loans, and one way to mitigate the risk is by using an experienced contract builder. A contract builder has home warranty insurance which reduces the risk for both the lender and for you.
In either case, the bank will need copies of the council approved plans and specifications (council stamped), a fully itemised tender or signed building contract and any other improvements if you are doing a full construction renovation. If you are only doing minor non-structural work like painting or air-conditioning, in most cases a quote is enough – some lenders do not even need this.
When do I get the money from the bank? Do they pay it in stages like a construction loan?
Similar to the previous points, the way the bank pays the money to you is going to depend on the scope of the work being completed. Broadly, there are two ways the banks will pay the funds to you. They might pay it in a lump sum in what they call ‘cash out’ where you can then withdraw the funds as you choose. Alternately, if the works are structural and involve a builder, the funds will be paid via progress payments. We have listed out a few examples below to give you an idea on how this would practically work:
Funds paid as lump sum:
- No intention to renovate (paid cash out)
- Minor renovations and cosmetic alterations (<$100k)
- Swimming pool loan or external landscaping
Funds paid progressively as construction loan:
- Major renovations and structural improvements (>$100k)
- Knock down a home or complete rebuild
- No licensed builder (sometimes referred to as owner builder)
- Low doc loans
- Property development or multi-unit apartments
Are there other financing options outside of home loans?
As we outlined from the beginning, it is imperative you are prepared and aren’t caught short half way through your renovations – but this does happen. Although this is not a method we ever recommend, personal loans are sometimes a quick and easy solution to help fill a $5,000 to $10,000 shortfall and, provided they are funded on a variable basis, there are usually minimal penalties to pay it off early. You can also use a credit card to pay for smaller items, but just don’t get caught in the trap of taking more than 55 days to pay the balance and paying extremely high interest.
Overall, finance is one of the most important parts of property renovations – as we started with, without the funds you aren’t going to get very far. You need to put your best foot forward with all lenders so working with an expert mortgage broker like Red & Co will help match you with banks that specialise in renovation and construction lending, getting you through your project quickly and profitably!
Chat to our team today on 1300 88 73 28 or contact for a free consultation here.