A $10,000 bathroom refresh and a $200,000 extension should not be financed the same way.
That is the problem with asking which loan is “best” for home improvements. The answer depends on how much you need, how quickly you want to repay it, whether you own the property and whether you are comfortable securing the debt against an asset.
For homeowners with enough equity, a mortgage top-up can offer a lower interest rate. For a smaller or medium-sized project, a personal renovation loan can be simpler and keep the debt on a much shorter term. For a major structural renovation, dedicated construction or renovation lending may make more sense.
The cheapest-looking rate is not always the cheapest option once the repayment term is included.
What type of loan is best for home improvements?
There is no single answer, but the main options are:
- Personal renovation loan: often suited to small and medium projects where you want a fixed loan amount and repayment term
- Home loan top-up: often worth considering for homeowners with sufficient equity, particularly for larger projects
- Mortgage refinance: potentially useful if you are undertaking a major renovation and your existing mortgage is due for review anyway
- Construction or renovation lending: designed for substantial building work where money may need to be released in stages
- Secured personal loan: can provide lower personal-loan rates if you have an acceptable asset to use as security
- Credit or interest-free finance: potentially useful for very small costs that can genuinely be cleared before higher interest kicks in
Option 1: A personal renovation loan
A personal loan is one of the most straightforward ways to finance home improvements.
You borrow an agreed amount, receive the funds and repay the loan over a fixed term. The money can then be used to pay builders, tradespeople and suppliers as the project progresses.
The biggest advantage is that the renovation debt stays separate from your mortgage.
If you borrow $25,000 over four years, you know the intention is to clear that $25,000 within four years. You are not automatically turning a new kitchen into debt that could still be sitting inside your mortgage 20 years from now.
Personal loans are also available to people who do not own the property outright or do not have enough equity to qualify for a mortgage top-up.
The trade-off is the interest rate. Personal-loan rates will generally be higher than competitive home-loan rates.
A personal renovation loan can make sense for work such as:
- Kitchen renovations
- Bathroom upgrades
- Flooring
- Painting
- Landscaping
- Decks and fencing
- Heat pumps
- Insulation
- Roofing and repairs
- Smaller extensions
- General maintenance
Secured or unsecured renovation loan?
A personal renovation loan can be secured or unsecured.
An unsecured loan does not require you to pledge a specific asset against the debt. That can suit borrowers who do not want to secure their renovation against an asset or do not have suitable security available.
A secured loan uses an acceptable asset, such as a vehicle, as security. Because that reduces the lender’s risk, secured loans can attract lower rates than equivalent unsecured borrowing.
There is an obvious trade-off.
If you fail to meet the loan obligations, the secured asset may be at risk.
Through Lending Room, secured renovation-loan rates currently start from 8.99% p.a. (AIR), while unsecured rates start from 10.99% p.a. Rates range up to 29.95% p.a. depending on your credit profile, loan amount, term, security and lender criteria.
Option 2: A home loan top-up
If you own a home and have enough equity, topping up your mortgage is another common way to finance improvements.
A top-up means borrowing additional money against your property.
Say your house is worth $800,000 and you currently owe $500,000 on the mortgage. If your lender agrees, you may be able to borrow another $50,000 for renovations, increasing the total home lending to $550,000.
The obvious attraction is the interest rate.
Home lending will generally carry a lower interest rate than a personal loan because the debt is secured against your property.
For a large renovation, that difference can be significant.
But there is a catch.
The mortgage-term trap
A lower rate can still produce a higher total interest bill if you leave the renovation debt sitting there for long enough.
Imagine borrowing $30,000.
For illustration, $30,000 at 12% over five years produces roughly $10,000 in interest.
Put that same $30,000 onto a mortgage at 6% but leave it there for 15 years and the interest bill is roughly $15,500.
The interest rate was cut in half.
The total interest went up.
That is what happens when a short-term expense gets stretched across a long mortgage.
If you use a mortgage top-up for renovations, ask whether the additional borrowing can be structured as a separate loan portion and repaid faster than the main mortgage.
You can then get more of the benefit of the home-loan rate without turning your bathroom renovation into 20 years of repayments.
When is a mortgage top-up likely to make more sense?
A home-loan top-up becomes more attractive when:
- You have sufficient equity
- The renovation cost is relatively large
- Your lender is offering competitive home-loan pricing
- The costs of arranging the top-up are reasonable
- You can afford to repay the renovation portion aggressively
- You are comfortable securing the additional debt against your home
Your lender will still assess affordability.
Having $300,000 of equity does not mean you can automatically borrow $300,000. Your income, expenses, existing debts, property value and ability to service the increased mortgage all matter.
For substantial work, the lender may also ask for building plans, contracts, council consents or a property valuation.
Option 3: Refinancing your mortgage for renovations
Refinancing means moving your home loan to another lender or restructuring your existing lending.
It can make sense if you are planning a large renovation at the same time as reviewing your mortgage.
For example, you might refinance the existing mortgage and borrow an additional amount to fund the project.
This gives you the opportunity to look at both the renovation finance and your existing home-loan structure at the same time.
But refinancing an entire mortgage to fund a relatively small renovation can be overkill.
There may be valuation costs, legal work, break costs on existing fixed lending and other fees to consider.
If you need $15,000 for new flooring and paint, moving a $600,000 mortgage to another bank solely to access that $15,000 may make very little sense.
Again, look at the complete transaction rather than the interest rate attached to the new money.
Option 4: Construction or major renovation lending
A new kitchen is one thing.
Removing half the house and building it again is another.
Major structural renovations can require a different form of home lending where funds are released progressively as work is completed.
This is often referred to as progress payments or drawdowns.
Instead of receiving the full $250,000 renovation budget on day one and immediately paying interest on all of it, the lender may release money at agreed stages.
This type of finance is generally more involved than taking out a personal loan.
The lender may want plans, a fixed-price building contract, council consent, insurance and valuations before or during construction.
For a major extension or rebuild, however, that additional structure can make sense.
For example:
- Deposit to the builder
- Foundations or structural work
- Framing
- Internal work
- Completion
What about special loans for energy-efficient improvements?
Before using standard finance, check whether your planned improvement qualifies for a special home-loan programme.
Some banks offer discounted home-loan top-ups for eligible improvements such as:
- Insulation
- Heat pumps
- Double glazing
- Solar panels
- Batteries
- Ventilation
- Other energy-efficiency work
These products can be considerably cheaper than normal consumer borrowing when your project meets the eligibility rules.
They will not fund every renovation. A new designer kitchen is unlikely to qualify simply because the fridge uses less power.
But if the work is specifically designed to make the property warmer, healthier or more energy efficient, it is worth checking before taking out a standard renovation loan.
Is a credit card a good way to pay for home improvements?
For a complete renovation, usually not.
Credit cards can carry high interest rates and do not give you the same fixed end date as a personal loan.
They can make more sense for a small purchase if you already have the cash flow to clear the balance quickly or are genuinely using an interest-free offer within its conditions.
For example, putting a $1,500 appliance on short-term interest-free finance and clearing it before interest applies is very different from funding a $35,000 bathroom across several credit cards.
The danger is financing a long-term project with revolving debt that never seems to disappear.
How much are you actually borrowing?
Renovation budgets have a habit of moving.
You start with $20,000.
Then the builder opens a wall.
Then the plumbing needs replacing.
Then the tiles you originally priced are unavailable.
Suddenly the $20,000 project is a $27,000 project.
Before choosing finance, work out a realistic project cost and leave room for unforeseen expenses.
That does not mean borrowing the maximum amount a lender is willing to give you.
It means understanding the likely full cost before you commit to a finance structure that is too small.
For larger projects, getting written quotes before arranging the loan gives you a much better number to work from.
Do not choose the loan based on the repayment alone
This is the easiest number to manipulate.
Loan A costs $900 a month.
Loan B costs $450 a month.
Loan B looks much easier.
But if Loan A ends in three years and Loan B ends in eight, you are not comparing the same thing.
The best loan is the one that gives you the right balance between an affordable repayment and an acceptable total cost.
When assessing a home-improvement loan, compare:
- Amount borrowed
- Interest rate
- Loan term
- Regular repayment
- Establishment fees
- Broker fees
- Mortgage restructuring costs
- Valuation or legal costs where relevant
- Early repayment charges
- Total interest
- Total amount repaid
- Assets being used as security
Personal loan vs mortgage top-up: which one wins?
For large renovations and homeowners with strong equity, a home-loan top-up can be hard to beat on interest rate.
For small to medium projects, a personal renovation loan can be more straightforward and keeps the borrowing on a defined term.
For major structural work, dedicated construction-style lending may be more appropriate because the lender can release money as the project progresses.
For energy-efficiency work, check specialist bank top-ups before using standard finance.
And for very small improvements, borrowing at all may not be necessary if you can comfortably use savings without wiping out your emergency fund.
There is no winner across every renovation.
The project decides the finance, not the other way around.
Where Lending Room fits
Lending Room does not provide mortgages. We are an independent registered finance broker specialising in options including personal and renovation loans.
If a home renovation loan makes more sense than restructuring your mortgage, we can assess your application across multiple vetted lenders rather than making you apply to them one at a time.
Our initial assessment uses a soft credit check, so our check does not affect your credit score.
Renovation loans through our panel range from $3,000 to $250,000 over terms from 6 to 84 months, with secured and unsecured options available.
You can read more about home renovation loans through Lending Room or get in touch with our team if you want to understand what personal-loan options are available for your project.
Frequently asked questions
What is the best loan for renovating a house?
It depends on the size of the renovation and your circumstances. Homeowners with sufficient equity may find a mortgage top-up has a lower interest rate. Personal renovation loans can suit smaller or medium-sized projects where you want to keep the borrowing separate from the mortgage and repay it over a shorter term.
Is it better to use a personal loan or add renovations to your mortgage?
A mortgage top-up will generally have a lower interest rate, but a personal loan normally has a much shorter repayment term. Extending renovation borrowing over a long mortgage can result in more total interest even when the rate is lower. Compare the full repayment cost of both options.
Can I get a loan specifically for home improvements?
Yes. A renovation loan is generally a personal loan being used specifically for home improvements. It can be secured or unsecured depending on the lender, borrower and amount required.
How much can I borrow for home improvements?
Through Lending Room’s lender panel, renovation loans range from $3,000 to $250,000. How much you can actually borrow depends on your income, expenses, credit profile, existing financial commitments and lender criteria. Mortgage-based renovation lending will depend on factors including equity and affordability.
Do I need to own my house to get a renovation loan?
Not for an unsecured personal renovation loan. Mortgage top-ups require property ownership and sufficient equity, but personal loans can be used for eligible improvement projects without securing the borrowing against the house.
Is a secured renovation loan cheaper than an unsecured loan?
Secured loans can attract lower interest rates because an acceptable asset is used as security. Lending Room’s secured renovation-loan rates currently start from 8.99% p.a. (AIR), compared with 10.99% p.a. for unsecured options. Your actual rate depends on your individual circumstances and lender criteria.
Should I borrow extra for renovation cost overruns?
Build a realistic contingency into your budget before applying rather than automatically borrowing as much as possible. Larger projects can produce unexpected costs, but every additional dollar borrowed also attracts interest. Quotes and a detailed project budget make it easier to choose an appropriate loan amount.
This article is for general information only and does not constitute financial advice. Lending Room is a registered financial services provider (FSP486566). We are a broker and do not lend directly. For vehicle and personal lending, rates range from 8.99% to 29.95% p.a. (AIR). Secured renovation-loan rates start from 8.99% p.a. and unsecured rates from 10.99% p.a. Establishment fees up to $450 and broker fees up to $1,500 may apply. Your rate and approval are subject to lender credit criteria.