Avoid These 4 Mistakes When Refinancing for Renovations

Refinancing to pull equity out for renovations is one of the more common reasons property owners reach out to a broker.

The decision you're trying to make is whether the numbers work, whether the lender will agree, and whether you'll regret the structure six months after the builder leaves. Most people focus on how much they can access. The more useful question is how much you should access, and how that amount fits with what the bank will actually lend against your property in its current state.

Mistake 1: Assuming Your Property Will Value Where You Think It Will

Your lender will order a valuation before approving the refinance. That valuation determines how much equity you can access, and it often comes in lower than expected.

Consider a property owner in Merewether with a home they believe is worth around $1.1 million based on recent sales in the street. They owe $600,000 and want to access $150,000 for a kitchen and bathroom renovation. The valuation comes back at $1.05 million. At 80% lending, the maximum loan is $840,000. After repaying the existing $600,000, they can access $240,000 in equity, but the lower valuation just cost them $40,000 in available funds. If they'd planned the renovation around $150,000 and signed contracts, that $40,000 gap creates a problem.

Before you commit to a builder or a scope of work, get a realistic sense of what the property will value at in its current condition. A broker can often give you a rough range based on recent sales and comparable properties. That's not a guarantee, but it's more reliable than your own estimate if you haven't sold a property recently.

Mistake 2: Refinancing the Full Amount as Principal and Interest When Interest-Only Suits Renovations

Most people refinance to a principal and interest loan because that's what they're used to. But if you're pulling out a large sum for renovations, switching the entire loan to interest-only for a few years can give you breathing room while the work is being done and while you're managing the additional cost of trades, materials, and the disruption to your household.

Interest-only doesn't mean you're not paying down debt. It means you're choosing when and how much to pay down, rather than being locked into a higher minimum repayment at a time when cash flow is tight. Once the renovation is complete and you've settled back into normal spending, you can revert to principal and interest or make lump sum payments if your loan structure allows it. Refinancing to access equity is a good time to reassess your repayment structure, not just your interest rate.

How Much Equity Can You Actually Access Without Lenders Mortgage Insurance?

Most lenders will lend up to 80% of your property's value without requiring you to pay lenders mortgage insurance. If you want to borrow more than that, you'll need to factor in the insurance cost, which can add several thousand dollars to your loan.

The calculation is straightforward. Take the property's valuation, multiply by 0.8, and subtract what you currently owe. The result is how much equity you can access without insurance. If your property values at $900,000 and you owe $500,000, the maximum loan at 80% is $720,000. Subtract your current debt, and you have $220,000 available. If you need $250,000, you'll be borrowing at 83% and paying insurance on the amount above 80%.

That insurance doesn't add value to your renovation. It's a cost you wear because you're borrowing above the lender's standard threshold. In some cases it makes sense, particularly if the renovation will add more value than the insurance costs. In most cases, it's worth adjusting your renovation budget to stay under 80%.

Mistake 3: Choosing a Lender Based Only on the Interest Rate Without Checking Redraw and Offset Access

The lowest interest rate is not always the most useful loan structure when you're accessing equity. If you're pulling out $100,000 for a renovation but only spending $60,000 in the first six months, you want somewhere to park that $40,000 so it's not sitting in a transaction account earning nothing while you're paying interest on it.

An offset account lets you deposit the unused funds and offset the interest on that portion of the loan. A redraw facility lets you pay extra into the loan and pull it back out if needed. Not all lenders offer both, and some charge monthly fees for offset accounts that erode the value if you're not using them properly. If your loan doesn't have an offset and you're holding $40,000 in a savings account earning 2% while paying 6% on the loan, you're losing 4% on that amount until it's spent.

When comparing refinance options, check what happens to the money between drawdown and spending. A loan that's 0.2% higher in interest rate but includes a free offset account often works out cheaper over the course of the renovation than the lowest rate with no offset.

Mistake 4: Not Structuring the Loan to Separate the Renovation Debt if You Plan to Rent the Property Later

If there's any chance you'll convert this property to an investment in the future, the way you structure the refinance now will affect how much interest you can claim as a tax deduction later.

Interest on debt used for investment purposes is generally deductible. Interest on debt used for private purposes is not. If you refinance your owner-occupied home, pull out $120,000 for a renovation, and later rent the property out, the interest on that $120,000 is not deductible because the funds were used for private purposes. The interest on the original loan used to purchase the property remains deductible, but the renovation portion does not.

The solution is to split the loan into two accounts at the time of refinance. One account holds the original debt used to buy the property. The other holds the $120,000 for renovations. If you later convert to an investment, the interest on the purchase loan is deductible, and the interest on the renovation loan is not. Without that split, the debts blend together and you lose the ability to separate them for tax purposes. Setting this up at the time of refinance costs nothing and keeps your options open.

When Refinancing for Renovations Makes Sense and When It Doesn't

Refinancing to access equity works when the renovation adds value, improves how you use the property, or solves a problem that's affecting your quality of life. It doesn't work when the cost of refinancing and the additional interest outweigh the benefit of the renovation.

The cost of refinancing includes discharge fees from your current lender, application fees for the new lender, valuation fees, and sometimes legal costs. These can add up to $1,500 to $3,000 depending on the lender and your loan size. If you're refinancing purely to access equity and your current interest rate is already competitive, check whether your existing lender will increase your loan without requiring a full refinance. Some lenders will, particularly if you've been making repayments on time and the property has enough equity.

If your current loan is on a high interest rate or you're coming off a fixed rate period and the variable rate is significantly higher than what's available elsewhere, refinancing makes sense even before you factor in the renovation. The equity access is an additional benefit rather than the only reason to move.

Call one of our team or book an appointment at a time that works for you. We'll run the numbers on your property, compare what's available across lenders, and structure the loan so you're not paying more than you need to or setting yourself up for problems down the track.

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