Everything You Need to Know About Renovating Your Home

How Renovation Loans Work with Your Existing Home Loan

A renovation loan allows you to borrow against the equity in your home to fund structural changes, extensions, or major upgrades. Most lenders treat this as a top-up to your existing home loan, increasing your loan amount while keeping the property as security. You can also refinance and increase the loan limit simultaneously if your current rate or loan structure no longer suits your situation.

Consider a homeowner in Mount Waverley who purchased three years ago and now wants to add a second storey. The property has increased in value, creating usable equity. The borrower applies for a loan top-up of $180,000, bringing the total loan amount to $620,000. The lender reassesses serviceability at current rates, applies the 3.0 percentage point buffer required under APRA policy, and approves the increase. The renovation funding is released in stages as the builder completes each phase, with the lender conducting inspections before each drawdown. The loan remains on a principal and interest structure, with repayments adjusted to reflect the higher balance.

Variable or Fixed Rate for Renovation Funding

You can apply a variable rate, fixed rate, or split the loan so part of the balance is fixed and part remains variable. A variable rate gives you access to an offset account, which reduces the interest charged on the portion of the loan balance covered by your savings. If you plan to hold surplus cash during the renovation period or afterwards, the offset can reduce your overall cost. A fixed rate locks in repayments for a set term, but most fixed products do not offer offset functionality and impose limits on extra repayments without triggering break costs.

A split loan structure lets you fix part of the balance for certainty while keeping the remainder variable for flexibility. In a scenario where a borrower funds a $150,000 renovation, they might fix $100,000 for three years to protect against rate increases and leave $50,000 variable with an offset. This structure gives them predictable repayments on the larger portion while retaining full access to redraw and offset on the variable component.

How Lenders Assess Renovation Loan Applications

Lenders base their approval on your current income, expenses, the loan to value ratio after the top-up, and the expected value of the property once the renovation is complete. If the renovation will increase the property's market value, some lenders use the post-renovation valuation when calculating the LVR. Others apply a more conservative approach and assess the loan against the current value only, which can limit how much you can borrow.

You will need to provide a detailed scope of works, builder quotes, council approval if required, and evidence that the renovation is feasible within your budget. The lender may also require progress inspections and will typically release funds in stages rather than as a lump sum. This protects both you and the lender by ensuring the work is progressing before additional funds are advanced. If your total LVR after the top-up exceeds 80 per cent, Lenders Mortgage Insurance may apply, adding to the upfront cost of the loan increase.

Interest-Only Repayments During Construction

Some borrowers switch to interest-only repayments during the renovation period to reduce cashflow pressure while they are managing builder payments, temporary accommodation, or dual costs. An interest-only period means you are not reducing the loan balance, but your required monthly repayment is lower. Once the renovation is complete, the loan typically reverts to principal and interest repayments.

This structure works for borrowers who expect their financial position to improve after the renovation is finished, or who prefer to direct available cash toward the build itself rather than loan repayments. Under APS 112, a long-term interest-only loan with an LVR greater than 80 per cent and a contractual interest-only period exceeding five years is classified as non-standard, which affects the capital treatment applied by the lender. For most renovation scenarios, an interest-only period of 12 to 24 months is sufficient and does not trigger this classification.

Using Equity from Investment Properties

If you own an investment property with available equity, you can use that equity to fund renovations on your owner-occupied home or another investment property. The loan structure remains separate, but the investment property is used as additional security. This approach allows you to access funding without increasing the LVR on your primary residence.

The interest on borrowings used to renovate an investment property is generally tax-deductible, provided the renovation maintains or improves the income-producing capacity of the property. Interest on borrowings used to renovate your owner-occupied home is not deductible, even if the funds are secured against an investment property. Borrowers should seek advice from a licensed tax adviser to confirm the treatment of interest deductions in their specific circumstances.

Refinancing to Fund Renovations and Improve Your Rate

If your current loan has a higher rate than what is available elsewhere, refinancing allows you to secure a lower rate and increase your loan amount at the same time. The new lender pays out your existing loan and provides the additional funds needed for the renovation. You benefit from a lower interest rate on the entire balance, which can offset some or all of the cost of borrowing the extra amount.

Refinancing also gives you the opportunity to restructure your loan, add an offset account if you do not currently have one, or move from a fixed rate that no longer suits your situation. The cost of refinancing includes discharge fees from your current lender, application fees with the new lender, valuation costs, and potentially settlement fees. If you are exiting a fixed rate loan early, break costs may apply depending on the difference between your fixed rate and current wholesale rates.

Renovation Loans and Serviceability Under Current APRA Rules

All lenders assess your ability to service the increased loan amount at a rate that is at least 3.0 percentage points above the product rate. If you are applying for a variable rate loan at 6.2 per cent, the lender will assess your capacity to repay at 9.2 per cent. This buffer has been in place since October 2021 and applies to all new lending and loan increases, including renovation top-ups.

If your income has remained stable but your expenses have increased since your original loan was approved, you may find that your borrowing capacity has reduced. Lenders also apply debt-to-income limits under the framework activated by APRA from 1 February 2026. Each lender can provide up to 20 per cent of new owner-occupier loans to borrowers with a total DTI ratio of six times or greater. If your total debt including the proposed top-up exceeds six times your gross annual income, the lender may still approve the loan, but it will count toward that 20 per cent threshold and may be subject to additional scrutiny.

When a Construction Loan Structure Might Be Required

If the renovation involves a large-scale rebuild, demolition and reconstruction, or a project where the property will be uninhabitable for an extended period, some lenders classify the funding as a construction loan rather than a standard renovation top-up. A construction loan operates differently. Funds are drawn down in stages as the builder completes each phase, and you typically pay interest only on the amount drawn rather than the full approved limit.

The application process for a construction loan requires detailed builder contracts, engineering plans, council permits, and evidence of builder insurance. The lender conducts inspections at each stage and releases funds only when satisfied that the work has been completed to the required standard. This structure suits large projects but involves more administration and a longer approval process than a standard loan increase. For smaller renovations such as kitchen upgrades, bathroom remodelling, or cosmetic improvements, a loan top-up is usually sufficient and faster to arrange.

Call one of our team or book an appointment at a time that works for you. We work with owner-occupiers across Melbourne and can help you access home loan options from lenders who understand renovation funding and can structure the loan to match your timeline and budget.

Frequently Asked Questions