- Renovations vary from small DIY projects to major remodels. They can help increase property value and make homes more appealing to future buyers.
- Personal loans suit smaller, short-term upgrades with lump-sum funding, while construction loans fit larger projects with staged payments.
- Choosing the right loan upfront helps keep renovation costs manageable and aligned with your project’s scope.
Homeowners renovate for all kinds of reasons - boosting property value, modernising tired spaces, or simply making a house feel more like a home.
Projects can range from a few weekends of DIY painting to installing a pool or undertaking a full-scale remodel, and almost all renovations require extra funds. If you don’t have the cash on hand, financing options can help bring your plans to life.
The two most common choices are personal loans and construction loans. Selecting the right one upfront can make your project far more manageable and cost-effective.
Personal loans vs construction loans
When it comes to financing home renovations, the choice between a personal loan and a construction loan largely depends on the size and scope of your project.
At a glance, the table below shows the key differences between a personal loan and a construction loan:
Feature |
Personal Loan |
Construction/Renovation Loan |
|---|---|---|
| Best for | Smaller, short-term projects (painting, landscaping, minor upgrades) | Larger, long-term renovations or extensions |
| Loan amount | Typically lower (often up to tens of thousands) | Higher amounts, often starting around $150,000 |
| Repayment term | Shorter (usually 5–7 years) | Longer (up to 30 years) |
| Interest rates | Generally higher | Generally lower, tied to mortgage-style lending |
| Funds release | Lump sum upfront | Staged payments as work progresses |
| Security | Can be secured or unsecured | Usually secured against the property |
| Flexibility | Quick access, simple application | More complex, requires detailed renovation plans and lender approval |
When to choose a personal loan
Many lenders offer personal loans, allowing customers to borrow an agreed amount. The borrower will then pay back the loan, plus interest, over a set amount of time – generally around seven years.
People often turn to personal loans to pay for things like holidays, weddings, and, of course, home renovations.
Some lenders even call certain personal loan products ‘renovation loans’. Typically, the main difference between a renovation loan and a personal loan is the name.
If your renovation job is a small one, or you’re expecting to freshen up your home on the cheap with plenty of DIY, this could be the right loan option for you.
Compare personal loans
Compare some of the best personal loans from banks and lenders across Australia to help you find the right choice for you.
| Lender | Car Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Interest Type | Secured Type | Early Exit Fee | Ongoing Fee | Upfront Fee | Total Repayment | Early Repayment | Instant Approval | Online Application | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.76% p.a. | 5.76% p.a. | $384 | Fixed | Unsecured | $0 | $0 | $275 | $23,066 |
| Promoted | Disclosure | ||||||||
5.95% p.a. | 5.95% p.a. | $386 | Fixed | Unsecured | $0 | $0 | $0 | $23,171 |
| Promoted | Disclosure | ||||||||
5.95% p.a. | 5.95% p.a. | $386 | Fixed | Unsecured | $0 | $0 | $0 | $23,171 |
| Promoted | Disclosure | ||||||||
7.44% p.a. | 8.27% p.a. | $400 | Fixed | Unsecured | $0 | $0 | $595 | $24,011 | |||||||||||
6.78% p.a. | 7.17% p.a. | $394 | Fixed | Secured | $0 | $0 | $275 | $23,637 | |||||||||||
6.99% p.a. | 7.34% p.a. | $396 | Fixed | Secured | $0 | $0 | $250 | $23,756 | |||||||||||
6.30% p.a. | 6.30% p.a. | $389 | Fixed | Unsecured | $0 | $0 | $0 | $23,367 | |||||||||||
7.99% p.a. | 7.99% p.a. | $405 | Fixed | Unsecured | $0 | $0 | $0 | $24,326 |
When to choose a construction loan
If you’re planning a large or costly renovation, you might turn to a construction loan. A construction loan, also known as a renovation loan, is a type of home loan designed specifically for building new houses and undergoing large-scale renovations.
This type of finance product is sometimes called a building loan, home improvement loan, or another combination of the above.
The nitty-gritty details of construction loans can differ between lenders, but many will require a minimum loan amount of $150,000, so the renovation might need to be substantial.
Usually, you’ll be allowed access to your borrowed cash as you need it, rather than in a lump sum. This might let you pay invoices and material costs as they come and save you from paying interest on money you haven’t needed yet.
Sometimes a lender will want to pay the borrowed money directly to a builder or trade, bypassing the borrower entirely.
How does a construction loan work?
A construction loan is normally assessed based on the estimated value of your home when you complete your planned renovation.
Construction loan payouts are usually delivered in six stages, so you don’t have to pay interest on the entire cost of the works from the start. Rather, you’ll only pay interest on the cash you’ve spent.
On top of that, you’ll likely be able to pay only interest until your project is complete. At which point, you’ll need to start making principal payments on top.
Construction loans can have loan terms of up to 30 years – just like a regular home loan - and revert to a regular P&I loan after.
But there are downsides to construction loans. They generally come with higher interest rates than regular home loans, as they’re often riskier for a lender.
Your lender will also want a lot more information from you before you take out a construction loan. They’ll want to know what you plan to do, when you plan to do it, and which trades you plan to use.
Many will also ask to inspect the works as they come along to make sure everything’s on schedule and budget.
Compare construction loans
Compare construction loan interest rates to find some of the best options for renovating your home.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Extra Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.79% p.a. | 5.85% p.a. | $2,413 | Interest-only | Variable | $0 | $835 | 70% | |||||||||||||
6.84% p.a. | 6.88% p.a. | $2,850 | Interest-only | Variable | $0 | $450 | 80% | |||||||||||||
6.04% p.a. | 6.18% p.a. | $3,011 | Principal & Interest | Variable | $0 | $1,212 | 70% | |||||||||||||
8.15% p.a. | 7.52% p.a. | $3,396 | Interest-only | Variable | $20 | $644 | 90% |
Can you use equity or borrow extra on your mortgage to renovate?
If taking out a personal loan or a construction loan to pay for your renovations doesn’t appeal, you might want to consider tapping into your equity or existing home loan.
You can do so by ‘topping up’ your home loan. That is, borrowing more money under the same loan. If you have a mortgage on a house that has increased in value or you’ve paid off a substantial amount of your home loan (or both), you might be able to take out your extra equity in cash to fund a renovation.
Keep in mind that doing so will increase the amount you owe. That means it will likely also bump up your repayments or the time it takes to pay off your loan (or both).
Refinancing your home loan could also be worth considering when looking to finance renovations.
Most people refinancing their mortgage are looking for a better interest rate. However, refinancing could also allow you to leverage your equity to fund renovations.
Unlike a construction loan, however, you’ll probably find yourself paying interest on all the funds you’ve borrowed from the start, rather than when you need them on your renovation journey. One way to get around this could be to put cash dedicated to your renovations in an offset account. That way, you mightn’t have to pay interest on money you don’t yet need.
Other loan products to fund home renovations
If none of those sound right for you, there are a few more options you might want to consider.
Credit card
Of course, the good old credit card can come in handy when it comes to paying for home renovations.
If you’re not planning to spend tens of thousands, and you feel like you can pay back your renovation costs as they come, credit cards might be the way to go.
Common downsides to credit cards are their typically small windows in which to pay off accrued debt. Generally speaking, the balance of a credit card needs to be paid off monthly or within a 55-day interest-free period or you might face interest payments or other fees.
Thus, credit cards might not be suitable for, say, a large renovation or one that might see unexpected costs arise.
Line of credit
Another option is a line of credit. They’re available under some home loans.
A line of credit typically works similarly to a credit card, but the funds you take out are attached to your home loan.
However, they can attract higher interest rates and other fees, so they might not appeal to some renovators.
Cash
And finally, after considering all the options, some homeowners might decide to stick to paying for their renovations with cash.
There are pros to cash. For starters, it doesn’t demand interest or fees. In fact, cash you haven’t spent can earn interest in a savings account up until the moment you need it.
However, saving the cash needed to fund your dream renovation can take a substantial amount of time. Not to mention, relying only on cash might leave you in the lurch if costs blow out – as can often happen when renovating.
First published in July 2023
