Unlock the secrets to renovating with a home loan

Banks want you to take out the loan product that makes them the most profit, not the one that fits your renovation.

Renovating in Randwick means dealing with tight street frontages, heritage overlays in parts of Coogee Road and the Conservation Area, and council requirements that can stretch timelines and budgets. The loan structure you choose now determines whether you can draw funds as the builder needs them or whether you're stuck paying interest on money you haven't spent yet. Most lenders will offer you a standard variable loan with a redraw facility and call it renovation-ready. It isn't.

Can you use a standard home loan to fund a renovation?

You can use equity in your property or refinance your existing loan to release funds for renovations. If you own your home outright or have enough equity, a lender will allow you to borrow against that equity to fund the build. The amount you can access depends on your loan to value ratio and how much usable equity sits in the property after accounting for costs and the lender's margin.

Consider a homeowner in Randwick who bought a two-bedroom semi five years ago and has paid the loan down to $650,000. The property is now worth more, and after a formal valuation, the lender confirms $950,000. At 80% LVR, the maximum loan is $760,000. Subtract the existing $650,000, and $110,000 is available for the renovation without paying LMI. If the renovation budget is $150,000, the buyer either contributes $40,000 in cash, accepts a higher LVR and pays LMI, or reduces the scope.

This structure works if the renovation happens in one payment or over a short period. If the builder requires staged payments across four months, you'll pay interest on the full $110,000 from day one even though half of it won't be spent until month three. That's where the wrong loan structure costs you.

Should you split your loan during a renovation?

Splitting your loan between a fixed portion and a variable portion with an offset lets you manage renovation funds without paying interest on money that's still sitting idle. You fix the amount you need for regular repayments at a lower rate and keep the renovation funds in a variable split with full offset access.

In our experience, splitting works when the renovation has a defined budget and the owner wants to protect serviceability during construction. The fixed portion covers the existing loan balance, and the variable portion covers the renovation drawdowns. You deposit the released equity into the offset account linked to the variable split and draw it down as invoices come in. Until you spend it, the offset balance reduces the interest charged on that split to near zero.

The alternative is fixing the entire amount and asking for a redraw facility. That might sound similar, but redraw access isn't guaranteed under all fixed loan products, and some lenders charge for each withdrawal. A split rate structure with offset gives you control without asking the bank for permission every time the plumber sends an invoice.

Do construction loans apply to renovations?

A construction loan is designed for building a new home on vacant land or undertaking a knock-down rebuild, and it releases funds in stages as the build progresses. Lenders assess progress claims from the builder and release money at practical stages such as slab down, frame up, lockup, and completion. You only pay interest on what's been drawn.

For a renovation that involves structural work, a second storey, or a large extension, some lenders will offer a construction loan structure even though the existing dwelling remains in place. The distinction comes down to whether the council has issued a Construction Certificate and whether the scope of work is significant enough that the lender considers it new construction rather than cosmetic improvement.

Renovations that involve internal reconfiguration, kitchen and bathroom replacements, or minor extensions are typically funded through equity release on a standard loan rather than a construction facility. The builder's payment schedule drives the decision. If payments are staged over six months with clear milestones, a construction loan avoids paying interest on undisbursed funds. If the renovation is minor or the payment schedule is short, the cost and complexity of a construction loan outweighs the benefit.

What interest rate applies to the renovation portion of your loan?

The interest rate on borrowed equity is the same as the rate on the rest of your loan, unless you split the loan and fix part of it at a different rate. If your existing home loan is on a variable rate and you borrow an additional amount for renovations, that additional amount is added to the variable loan balance and charged at the same variable rate unless you negotiate a separate split.

Rates vary depending on whether the loan is owner-occupied or investment, the LVR after the renovation funds are added, and whether you're refinancing or increasing your limit with your current lender. Lenders also distinguish between rate discounts available to new customers and the rates offered to existing customers who are increasing their loan. In many cases, moving to a new lender and refinancing the full amount including the renovation funds results in a lower rate than asking your current lender to top up the loan. This is one of the ways banks penalise loyalty.

A mortgage broker in Randwick will compare what your current lender offers on a top-up against what a new lender offers on a refinance, including any offset features, ongoing fees, and the ability to redraw or make extra repayments without penalty.

How does an offset account help during a renovation?

An offset account linked to the variable portion of your loan reduces the interest you pay on any funds that haven't been spent yet. If you release $120,000 in equity for a renovation and deposit that amount into a linked offset, the interest charged on that $120,000 is reduced to near zero until you draw the funds out to pay the builder.

This only works if the offset is a full 100% offset, not a partial offset, and if it's linked to a variable loan rather than a fixed loan. Most fixed loans do not offer offset accounts. If they do, the offset function is usually limited or comes with conditions that reduce its value during a renovation.

Randwick renovations often involve delays. Council may request additional documentation, a heritage assessment may take longer than expected, or the builder's schedule may shift due to weather or supply issues. An offset account means those delays don't cost you thousands in interest on funds that are still sitting in your account. Without an offset, you pay interest on the full renovation amount from the day the funds are released, regardless of when you actually spend them.

Can you claim interest on a renovation loan as a tax deduction?

If the property is an investment property, the interest on funds borrowed for renovations is generally tax-deductible, provided the renovations are not considered capital improvements that extend the life of the property or change its character. Repairs, maintenance, and cosmetic updates are usually deductible in the year they occur. Structural improvements, extensions, and additions are treated as capital works and depreciated over time.

If the property is your principal place of residence, the interest on the renovation loan is not tax-deductible. Owner-occupiers do not receive a tax benefit from borrowing to renovate their own home. This distinction matters when deciding whether to fund a renovation with debt or savings. Investment loans structured for renovations require documentation that links the borrowed funds to the income-producing property, and any personal use of those funds can affect the deductibility of the interest.

A mortgage broker will refer you to a tax specialist if the renovation involves both personal and investment components or if you're converting an owner-occupied property to an investment after the renovation is complete. The timing of the conversion and the way the loan is structured affect what portion of the interest can be claimed.

Should you fix your rate before starting a renovation?

Fixing your rate locks in your repayments for a set period, which can provide certainty during the renovation when your household budget may already be stretched. Fixed rates are typically lower than variable rates in a falling rate environment and higher in a rising rate environment. The decision depends on your tolerance for repayment changes and whether you need access to features like offset and redraw during the build.

If you fix the entire loan including the renovation funds, you lose offset access and may lose flexible redraw depending on the lender. If you fix only the portion of the loan that covers your existing balance and keep the renovation funds in a variable split, you retain offset access on the variable portion and lock in certainty on the rest. This is the approach that works for most renovators in Randwick who want predictable repayments without giving up control of their build funds.

Rate movements during the renovation period won't affect a fixed loan, but if rates fall significantly after you fix, you may end up paying more than you would have on a variable loan. Break costs apply if you want to exit a fixed loan early, refinance, or pay down a large lump sum during the fixed period. Those break costs can run into thousands of dollars depending on how far rates have moved and how much time remains on the fixed term.

What happens if the renovation goes over budget?

If your renovation budget blows out and you need additional funds, the lender will reassess your borrowing capacity and the current value of the property. If the renovation is incomplete, the lender may not revalue the property at the finished amount, which limits how much additional equity you can access. Some lenders allow a small increase to the loan without a full reapplication, but most require a new approval process if the additional amount is significant.

Going over budget mid-renovation is one of the most common ways buyers end up stuck between a builder demanding payment and a lender refusing to release more funds. The solution is to build a buffer into the original loan amount. If the renovation is quoted at $130,000, borrow $145,000 and keep the extra $15,000 in offset until you know whether it's needed. If it isn't, you can pay it straight back down without penalty on a variable loan, and the offset will have minimised the interest cost while it sat there.

Call one of our team or book an appointment at a time that works for you. We'll structure the loan so the renovation gets funded the way the builder needs it, not the way the bank wants to sell it.

Frequently Asked Questions