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Should you fund your renovation with a home loan or a personal loan?

04 November 2021
• 4 minutes read
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Should you renovate with a home loan or personal loan?

Home owners have many options when they're looking to get some extra cash to cover a renovation. You could apply to borrow a little more on your existing home loan to pay for the renovation, or take out a personal loan.

It's a good idea to examine the benefits and drawbacks of both options before deciding how to fund your home renovation.

Using a home loan to fund a renovation

If you've been paying off your mortgage, then you've probably built up some equity in your home. You can borrow some of this by increasing or "topping up" your home loan or refinancing with another lender. For most borrowers, this is a simple application process. Even better, if you’ve been paying extra off your home loan you may be able to fund your renovation via redraw if it’s available.

The benefits

  • A lower rate: Your home loan has a lower interest rate than a personal loan would have (and if it doesn't, you need to review your home loan fast!). This means your monthly interest charges will be much lower when topping up your home loan.
  • Speed: Topping up your home loan is usually quick and easy. You may even be able to apply via the lender's app if it has one.
  • Flexibility: Your lender may approve you for, say, a $30,000 top up, but you might only spend $15,000 on the renovation. In this scenario, you only pay interest on the money you spend, not the total limit.
  • Keep things simple: Managing multiple debts is no fun. Avoiding taking out a new loan and sticking with your mortgage keeps things simple.

The drawbacks

  • Reducing equity: Borrowing more on your home loan means reducing your equity. In other words, owning slightly less of your own home. If you're not planning to sell any time soon this won't really affect you, though.
  • Adding to your home loan: Obviously borrowing more money means your home loan debt gets bigger. This isn't always a bad thing, but it's something to be aware of. Borrowing extra money means repaying it. Your monthly loan repayments will increase, or you may be able to keep them the same but extend the length of your home loan, which means you pay even more interest over time.
  • A home loan is a long-term debt: While home loan interest rates are lower than personal loans, it usually takes 30 years to pay a home loan off. By taking many years to pay off a relatively small amount of money to fund a renovation, you might end up paying more interest in the long run.
  • Some home loans don't allow top ups: Check with your lender to see if you can actually borrow more. It's usually possible, but don't assume it's an option.

Home loans

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Using a personal loan to fund a renovation

Most banks and lenders offer various personal loan products. These loans are designed to be paid off within months or a few years (as opposed to a home loan). They typically have higher interest rates and a few fees, but you can easily shop around for a more competitive deal.

The benefits

  • Shorter loan terms: You can borrow the money you need and pay it back in just a few years. Personal loans have different loan terms (how long the loan is) and you can find one that suits your time frame.
  • More options: If you stick with your home loan, there's not much flexibility. If you choose to look for a personal loan, you can shop around, compare products and find a loan that suits you.
  • Faster access: With a personal loan, you may get access to the fund faster than with a home loan.

The drawbacks

  • Higher interest rate: You will most likely have a higher interest rate on a personal loan. Right now, most home loans have much lower rates than personal loans that have interest rates often double, if not higher.
  • Loan fees: Some personal loans tend have a few fees, including one-off application fees and ongoing monthly fees. You will probably pay more in fees compared to topping up your home loan.
  • Borrowing limit: Depending on the lender, there are usually limits to how much you can borrow.

Personal loans

Find a great personal loan for you

How to decide which option is right for you

When making your decision, start by working out how much you need to borrow. Then you need to check if your lender allows you to borrow that amount of money from your home loan, or any money at all.

Next, compare some personal loans and pick a few examples that look suitable for you. Note the interest rates, fees and the loan terms.

Last, work out what the repayments look like for each option using a loan calculator. See if different personal loan terms yield very different results. This way you can also determine how much interest you'll pay from extending your home loan.

Richard Whitten is the senior home loans writer at Finder, Australia’s most visited comparison site.

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