Beginner's guide to renovation home loans

What type of loan covers a renovation

Most renovations get funded through a construction loan or a refinance that releases equity from your existing property. A construction loan releases money in stages as the work progresses, while a refinance lets you borrow against the increased value your home will have after the work is done. The option that suits you depends on whether you already own the property and how much equity you have.

Consider a Scarborough homeowner who bought a 1970s brick and tile place a few streets back from the beach. They want to reconfigure the layout, add a second bathroom, and replace the kitchen. They owe $380,000 on a property that's worth around $650,000 before any work. They get quotes totalling $90,000 for the renovation. Because they already own the home, they look at refinancing to pull out that $90,000, which would take their total loan to $470,000. At that loan amount, their loan to value ratio sits around 72%, so they avoid paying Lenders Mortgage Insurance. The lender values the property at the current figure, not the renovated value, so the equity they already have does the heavy lifting.

How a construction loan works for renovations

A construction loan splits your borrowing into a base loan and a construction portion. You draw down the construction funds in stages, called progress payments, as the builder completes each phase. The lender will typically release funds after an inspection confirms the work has been done. You only pay interest on the money you've drawn down, so if you've taken $30,000 out of a $90,000 construction facility, you're only charged interest on that $30,000 until the next payment.

During the construction period, most lenders let you pay interest only on the drawn portion. Once the work finishes and all funds are released, the loan converts to principal and interest repayments unless you arrange otherwise. Construction loans usually come with a variable interest rate, though some lenders offer a fixed rate option once the build is complete. You'll also pay a higher interest rate during construction than you would on a standard home loan, often between 0.25% and 0.75% more, depending on the lender.

When refinancing makes more sense than a construction loan

If you have enough equity to cover the renovation costs and you want the money available upfront, refinancing avoids the progress payment structure and usually gives you access to lower interest rates. You borrow the full amount in one go, pay the builder or tradie as invoices come in, and you're charged interest on the entire loan from day one. This approach suits smaller projects or situations where you're coordinating multiple contractors yourself rather than working with a single builder.

Refinancing also lets you shop around for a loan product with features you didn't have before, like an offset account or a better rate discount. If your current loan has been sitting untouched for a few years, the rate you're paying might be higher than what you'd get by switching lenders. In our experience, homeowners in Scarborough who refinance for a renovation often review their whole loan structure at the same time, particularly if they're coming off a fixed rate that's about to expire.

What lenders look at when you apply

Lenders assess renovation loans the same way they assess any other application, starting with your income, expenses, and existing debts. They calculate your borrowing capacity based on whether you can service the new loan amount at a higher interest rate than you'll actually pay, usually around 3% above the current variable rate. They also want to see detailed quotes, plans, and sometimes council approval depending on the scope of work.

For a construction loan specifically, the lender will require a building contract with a licensed builder, a schedule of progress payments, and in some cases a quantity surveyor's report. If you're doing an owner-builder renovation, far fewer lenders will touch it, and those that do will usually cap the loan amount at a lower loan to value ratio. The same applies if you're planning to do some of the work yourself. Lenders want certainty that the job will be finished and that the property will be worth what you're borrowing against it.

How Scarborough properties affect what you can borrow

The beachside location and the mix of older homes and newer developments in Scarborough means property values vary widely depending on proximity to the ocean and the condition of the home. A weathered cottage two blocks from the esplanade might sit on the same value bracket as a renovated unit closer to West Coast Highway, but lenders see them differently. If your renovation brings an older property up to the standard of the surrounding area, the lender is more comfortable with the loan because the improved property will hold its value.

A valuer will consider comparable sales in Scarborough when deciding what your home will be worth after the renovation. If similar homes in your street have sold recently with updated kitchens and bathrooms, that supports your case. If you're overcapitalising by adding features that don't match the area, the valuer might not give you the post-renovation value you're hoping for, which can limit how much you can borrow.

Split loans and offset accounts during a renovation

Some borrowers use a split loan structure when refinancing for a renovation, fixing part of the loan and leaving part variable. This gives you rate certainty on the bulk of your borrowing while keeping flexibility on the portion you'll pay down faster. You can also link an offset account to the variable portion, which reduces the interest you're charged if you keep savings in that account.

An offset account can be particularly useful during a renovation if you're living elsewhere and renting out your Scarborough property for a few months while the work happens. The rent goes into the offset, reducing your interest, and you still have access to the funds if the renovation runs over budget or you need to cover an unexpected cost. Not all lenders offer offset accounts on construction loans, so if that feature matters to you, refinancing with a variable rate loan might be the better option.

Applying for pre-approval before you commit to quotes

Getting pre-approval before you lock in a builder or sign off on quotes tells you exactly how much you can borrow and whether the renovation is financially viable. Pre-approval is conditional, so the lender still needs to see the final contracts and plans, but it gives you a clear budget to work with when you're talking to tradespeople. It also strengthens your position if you need to negotiate on price or scope.

Pre-approval usually lasts three to six months depending on the lender, which gives you time to finalise the details without rushing. If your financial situation changes during that period, such as a drop in income or a new debt, the lender will reassess before final approval. That's why it's worth getting pre-approval sorted early, particularly if you're coordinating council approvals or waiting on builder availability.

Call one of our team or book an appointment at a time that works for you. We'll walk through your options, check what you can borrow, and help you set up a loan structure that fits the way you want to manage the renovation.

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