What are my options for financing home improvement projects?

couple sitting on their living room floor looking at paint samples for their upcoming home renovations funded with a personal loan

Are you thinking about doing some much-needed home renovation? It’s an exciting process, but one that you need to prepare for.

Whether you’re considering completely redecorating your entire home or just want a couple of minor improvements, the cost of your reno depends on various factors, such as the extent of the work and your budget.

If this project is something you’ve been setting money aside for, that’s great! But if you’re looking for other ways to finance your renovations, there are some great options, such as a personal loan or using your home equity.

What is home equity and how does it work?

Home equity is the difference between your home’s current market value and the outstanding balance on your mortgage. It is the value of the portion of your home that you own.

For example, if you have a $150,000 balance on a mortgage on a property worth $500,000, then you have $350,000 of home equity.

The more of your mortgage that you pay off, the higher your home equity. Similarly, if the value of your property increases, your equity will too, while it decreases if the value drops.

How can I use home equity to fund a renovation?

Having a good amount of equity can be a real asset for homeowners, as you can utilise it in a lot of ways.

It’s common to use your home equity to get a home equity loan, where you borrow against the equity you have built up. You can get a line of credit with a limit based on your equity that you then pay interest on. If your mortgage has a redraw facility, you can also draw upon any additional payments you have made. You can then use this cash to purchase another property, a car or even renovate your home.

There are some potential risks to a home equity loan or line of credit, as you are taking on additional debt with your home as collateral. If you use your equity loan for renovations, make sure that you can afford the repayments and that you don’t overcapitalise. You don’t want the loans you have over the home to be worth more than the home itself

Can I use a personal loan for a home renovation?

If you don’t have much home equity or are looking for another option to fund your home improvement project, you could consider a personal loan. A personal loan can help you cover the cost of your renovations while also spreading the payments over a long period.

How do I choose a personal loan?

You have two choices when choosing a renovation personal loan: secured vs unsecured and fixed vs variable.

According to the Mozo database, the average secured personal loan interest rate is 7.54%, while the unsecured rate is higher at 9.53%.

A secured personal loan requires collateral to be put against it (such as your home or car), making it a lower risk for the lender, and thus, a lower rate. Alternatively, an unsecured loan often has a higher interest rate but does not require any assets as security.

When considering a fixed rate personal loan vs a variable rate, you have to consider what works best for you.

Fixed rate loans let you know exactly how much you will be paying for the entirety of the loan. Sometimes, this can mean that they are more inflexible and have high fees for early repayment.

A variable loan rate changes with the market - so there are risks to consider. While the rate can go down, your lender can also hike it up at any time. That said, these loans usually come with more flexible payment options and free early repayments.

Want more on all things personal loans? Head over to our personal loans hub for guides and comparisons!

Check out some top renovation loans:

NOW Finance No Fee Unsecured Personal Loan (Fixed)
  • 2021 Mozo Experts Choice Award winner^
  • Borrow from $5000 to $50,000
  • No fees

With rates starting from 5.95% p.a. (5.95% p.a. comparison rate*), based on credit score, it’s no wonder the NOW Finance No Fee Unsecured Personal Loan received a 2021 Mozo Experts Choice Award^ for best Unsecured Personal Loan! It is available for any amount between $5,000 and $50,000, and you can repay it over a term ranging from 18 months to 7 years, depending on loan amount. You can also choose your own payment schedule, opting for either weekly or fortnightly. Now Finance also offers no fees and free extra repayments on this loan, but be aware that there is no redraw facility, so you cannot access that cash again.

OurMoneyMarket Low Rate Personal Loan
  • 2021 Mozo Experts Choice Award winner^
  • Fixed rates from 5.45% p.a. (6.07% p.a. comparison rate*)
  • Free redraw facility & extra repayments

The OMM Low Rate Personal loan offers competitive fixed rates starting at 5.45% p.a. (6.07% p.a. comparison rate*), based on credit score, on loans over $2,000 and up to $75,000 - plus free extra repayments and fee-free redraw facility. It also bagged a 2021 Mozo Experts Choice Award^ for best Unsecured Personal Loan! While there are no service, exit or early repayment penalties, the OurMoneyMarket Low Rate Personal Loan does have a $250 (minimum, depending on credit score) upfront fee and a $35 late payment fee. So, you’ll want to make sure you’re on time with repayments.

Alex Bank Personal Loan
  • 2021 Mozo Experts Choice Award winner^
  • Fixed rates from 4.99% p.a. (4.99% p.a. comparison rate*)
  • Free extra repayments
Find out more

Alex Bank Personal Loan took the Mozo Experts Choice Award^ for Best New Loan Product in 2021! It offers competitive rates starting at 4.99% (4.99% comparison rate*), depending on credit score, on loans from $2100 to $30,000 - and it also comes with flexible repayment options. While you can make free additional payments and there are no early settlement fees, keep in mind that this loan has no redraw facility, so you will not have access to that cash again. If you miss a payment, you will face a $20 late fee. Additionally, there is usually a $295 establishment fee, but Alex Bank is waiving it on applications fully submitted before November 3rd, 2021.

Symple Loans Personal Loan
  • Variable interest rates from 5.75% p.a. (6.47% p.a. comparison rate)
  • Borrow up to $50,000
  • Earn Qantas Points on your loan (terms and conditions apply)
Find out more

Symple Loans Unsecured Personal Loan offers credit-based variable interest rates starting from 5.75% p.a. (6.47% p.a. comparison rate*). You can take out between $5,000 and $50,000 with terms from 1 to 7 years, and, as a bonus, you can earn 1 Qantas Point for every $1 you borrow once the loan is approved and drawn (terms and conditions apply). Although the Symple Loans Unsecured Personal Loan does allow for no-fee extra repayments, it does not have a redraw facility, so you will not be able to redraw that extra money. This loan does have some associated fees. It may come with an application fee if you receive a higher rate than 5.75% p.a. (6.47% p.a. comparison rate*), depending on credit. There is also a $10 monthly fee to consider, so make sure you plan for that in your budget. Additionally, if you fall behind on repayments, you will be charged a $35 late payment fee.

* WARNING: The Comparison Rate combines the lender's interest rate, fees and charges into a single rate to show the true cost of a personal loan. The comparison rates displayed are calculated based on a loan of $30,000 for a term of 5 years or a loan of $10,000 for a term of 3 years as indicated, based on monthly principal and interest repayments, on a secured basis for secured loans and an unsecured basis for unsecured loans. This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

^See information about the Mozo Experts Choice Personal Loan Awards

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