In short: There are four realistic ways to fund a renovation, and the right one is decided almost entirely by size. Under about $50,000, an unsecured personal loan or redraw is usually fastest. Between $50,000 and roughly $150,000, releasing equity by refinancing is usually cheapest. Above that, or where you are moving walls and need council approval, you need a construction facility with staged progress payments.
Choosing the wrong structure is expensive in both directions. People pay personal loan rates on a $120,000 extension because it was easier, and people set up a full construction facility with a $600 valuation and quantity surveyor reports for a $30,000 kitchen.
The four options compared
| Redraw or offset funds | Personal loan | Equity release by refinancing | Construction facility | |
|---|---|---|---|---|
| Typical amount | Whatever you have prepaid | $5,000–$50,000 | $30,000–$250,000 | $100,000+ |
| Typical rate | Your home loan rate | Well above a home loan rate | Home loan rate | Home loan rate, sometimes a small margin |
| Security | Already secured | Usually unsecured | Your home | Your home |
| Council approval needed | No | No | Not for the loan | Usually yes for the works |
| Fixed price builder contract needed | No | No | No | Yes, almost always |
| Valuation | None | None | "As is" valuation | "On completion" valuation |
| Funds released | Immediately | Immediately | At settlement, in a lump | In stages as work completes |
| Time to arrange | Same day | 1–5 days | 3–5 weeks | 4–8 weeks |
The key distinction: cosmetic versus structural
Lenders draw a line that most homeowners do not.
- Cosmetic renovation — new kitchen, bathroom, flooring, paint, landscaping, no structural change, no council permit. Funded from equity in a lump sum against the property's current value. Simple.
- Structural renovation — extensions, removing load-bearing walls, adding a storey, knockdown rebuild. Requires a building permit, a licensed builder under a fixed-price contract, and a lender who will lend against the on completion valuation with staged drawdowns.
If your project needs a building permit, assume you need a construction facility. See construction loans and construction loan progress payments.
Worked example: a $120,000 extension
The Sharmas own a Craigieburn home worth $780,000 with $410,000 owing. They want a $120,000 extension and a new kitchen.
Step 1 — how much equity is usable?
- Property value: $780,000.
- Maximum borrowing at 80% LVR without LMI: $780,000 × 0.80 = $624,000.
- Less the existing loan: $624,000 − $410,000 = $214,000 of usable equity.
So $120,000 is comfortably available without triggering LMI. Our equity calculator does this arithmetic for any figures.
Step 2 — what does it cost each way?
| Option | Rate (illustrative) | Term | Monthly cost of the $120,000 | Total interest |
|---|---|---|---|---|
| Personal loan | 12.00% p.a. | 7 years | $2,119 | $58,000 |
| Equity release, spread over the remaining 25 years | 6.00% p.a. | 25 years | $773 | $112,000 |
| Equity release, repaid in 7 years by choice | 6.00% p.a. | 7 years | $1,753 | $27,300 |
The middle row is the trap. The lowest monthly payment costs the most in total, because a $120,000 kitchen and extension gets paid off over 25 years alongside the original loan. The third row is what we usually recommend: release the equity at home-loan rates but set the repayment as if it were a 7-year loan, either by paying extra or by taking the new money as a separate split with a shorter term. That combination saves about $31,000 against the personal loan and about $85,000 against letting it ride for 25 years.
Splitting the loan also keeps the renovation debt visible and separate, which matters if part of the property later becomes income-producing. See split loan and debt recycling explained.
Step 3 — the valuation question
For a cosmetic renovation the lender values the house as it stands today. For a structural extension the lender values it as it will be when finished, based on your plans and the fixed-price contract. That "on completion" figure is usually higher, which is what makes a construction facility viable when the current equity alone would not stretch.
It is also where projects come unstuck. Spending $250,000 on a house in a suburb where the ceiling price is $850,000 will not produce a $250,000 valuation increase. A valuer works from comparable sales, not from your receipts. If you are renovating primarily for resale value, get an honest read on the local ceiling before you commit. Read low valuation: what to do.
Renovating an investment property
The tax treatment splits in a way that catches many investors out:
- Repairs and maintenance — restoring something to its original condition, like fixing a leaking tap or replacing a broken pane. Generally deductible in the year incurred.
- Capital improvements — a new kitchen, an extension, a deck. Not immediately deductible. Claimed over time as a capital works deduction, generally at 2.5% a year, and added to the cost base for capital gains tax.
- Initial repairs — fixing defects that existed when you bought the property. Generally treated as capital, not repairs, even though the work looks like maintenance.
A quantity surveyor's depreciation schedule after a renovation usually pays for itself. See depreciation and tax deductions for investors and confirm your position with a tax agent or at ato.gov.au.
The borrowing side also differs: the interest on money genuinely used to improve an income-producing property is generally deductible, while interest on money used on your own home is not. That is why the funds must be split cleanly and never mixed. Read offset versus redraw for why redrawing into a mixed account destroys deductibility.
Practical requirements
- Quotes. Two or three written quotes from licensed builders or trades. Vague estimates will not do for a construction facility.
- A fixed price contract. For structural work, a standard HIA or Master Builders contract. Cost-plus contracts and owner-builder projects are financeable by only a few lenders and usually at a lower LVR.
- Builder's registration and insurance. In Victoria, domestic building insurance is required for work over the prescribed threshold. Check the builder's registration with the state regulator before you sign.
- A contingency. Add at least 10% to the budget, and 15% for an older house where you will find something behind the plaster. Lenders will not usually increase a construction facility mid-build without a full reassessment.
- Permits. Get the building permit before, not after, the finance application if the works are structural.
Frequently asked questions
How much equity do I need to fund a renovation?
Enough that the new total loan stays within the lender's LVR limit. Without LMI that means 80% of the property's value, so a $780,000 home with a $410,000 loan has about $214,000 of usable equity. Some lenders will go to 90% with LMI, which unlocks more but adds an insurance premium. Use our equity calculator for your own figures.
Does the lender pay me or the builder?
For a cosmetic renovation funded by equity release, the money is paid to you at settlement and you pay the trades. For a construction facility, the lender pays the builder directly at each stage after an inspection confirms the work is done. That protects you from paying for work that has not happened, and it means you cannot use the money for anything else.
Can I do the work myself?
Owner-builder projects are financeable but the market is small and the terms are tighter, commonly a lower LVR and a requirement for an owner-builder permit and often a quantity surveyor's report. Lenders are wary because there is no builder's warranty and no fixed price. If the project is large, the finance is usually easier and the outcome more predictable with a registered builder.
Will renovating increase my property value by what I spend?
Not reliably. Kitchens, bathrooms and adding a bedroom or a second bathroom tend to return the most. Highly personal work, over-capitalising beyond the suburb's ceiling, pools and elaborate landscaping tend to return the least. If the renovation is for how you want to live, that is a perfectly good reason. If it is an investment, look at comparable sales for renovated houses in your street first.
Can I include the renovation in my loan when I buy?
Yes, and this is often the best moment to do it. A purchase-plus-renovation facility values the property on completion and funds both the purchase and the works, so you avoid a second application and a second set of costs. It needs the builder's quotes at the time of the purchase application, so start the conversation with us before you go to auction.
Is a renovation loan cheaper than a personal loan?
Almost always, because it is secured against your home. The trade-off is that it puts your home behind the debt and, if left on the standard 25 or 30 year term, costs far more in total interest. Take the home-loan rate but repay it on a personal-loan timetable and you get the best of both.
Talk to GNT Finance
Send us the quotes and the plans and we will tell you which of the four structures fits, what the monthly cost is under each, and how to keep the renovation debt from quietly becoming a 25-year commitment. Consultations in English, Nepali or Hindi, with an interpreter in your language on request. Book a free consultation or call 0426 403 703.
This page is general information only and not legal, tax or financial advice. Tax treatment of renovations depends on your circumstances — confirm it with the ATO or a registered tax agent.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.