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Can I get a cash out loan to fund my renovation?

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Have you bought a fixer-upper? Or, are you planning on upgrading your old kitchen? Finding the money to fund your renovation project can be time consuming and hard to navigate. You may not be able to cover your renovations with savings, so you may need to borrow money.

Here we'll walk you though the pros and cons of an equity home loan and how to make sure you don't overcapitalise when you renovate your property.

How much equity can you access?


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Can I refinance to pay for my home renovation?

This all depends on your personal situation. If you have a significant amount of equity in your property, you can apply for a cash out loan to pay for your renovations. You can typically access up to 80% of your current property's equity. How much equity you can access will vary from lender to lender and depends on how much you have already repaid.

What is a home equity loan?

A home equity loan, sometimes known as a ‘cash out loan', allows a homeowner to access the equity accrued in their property.

The amount of equity that can be accessed (loan amount) and interest charged is determined by:

  • The property’s current value
  • How much of the loan has been repaid
  • The homeowner’s credit score and personal finances
  • Purpose of the loan
  • The current state of the property market.

Home equity loans are useful because they allow homeowners to access large sums of money without needing to sell their property. Compared to other home loans, home equity loans are easier to qualify for and lower risk for lenders since the property itself is used as collateral against the loan.

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What are the benefits of home equity loans?


  • Renovate and increase your property's value: The biggest advantage of taking out a home equity loan is that the funds available will allow you to renovate your home. Hopefully, your renovations will increase the market value of your property. This may come in handy if you want to sell the property in the future.
  • Access to cash: Another advantage of a home equity loan is that you will have access to a large sum of money without having to sell your house. The money can be withdrawn at any time, allowing you to use it when you need it.
  • Repayment flexibility: If the loan is taken out with a line of credit account, you can make extra repayments whenever you want. This could reduce the total amount of interest paid on the loan and could also reduce the loan term.
  • Save on interest: Home equity loans can also have lower interest rates than other types of loans you might use to fund a renovation, such as credit cards or personal loans.

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What are the risks of accessing your equity?

  • Losing your home: The biggest risk with any home loan is that, if you are unable to make your new repayments, you can lose your house to your lender.
  • Owing more: Further disadvantages of taking out a home equity loan could be that you will increase the amount of money that you owe your lender.
  • Increased repayments: The equity that is taken out will be added to the principal amount and interest repayments, meaning that you will have higher repayment amounts and it will take you longer to repay your loan.
  • Money management issues: Also, because the money is easily accessible, you may be tempted to spend it on other things. For this reason, home equity loans may not be suitable for those who struggle to budget or manage their finances, or those who do not have a stable income.
  • LVR increases: Your LVR (Loan to Valuation Ratio) may increase. If your new LVR is more than 80% of the property’s value, it could mean that you will need to take out LMI (Lenders Mortgage Insurance) with your new application.
  • Fees: There may also be fees and costs associated with taking out a new home equity loan and for your existing home loan because you are refinancing, that is, changing home loan products or lenders.

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What is overcapitalisation and why is it bad?

Overcapitalisation is also a risk when renovating. Overcapitalisation occurs when the value of the property does not increase by the same amount you spent on renovating the property.

For example, say your property is worth $500,000 and you spend an additional $200,000 on renovations, if the value of your property after the renovations is only $650,000 then you have overcapitalised by $50,000.

This may only be a problem if you are renovating for the purpose of selling your property right away because you won't make the money you spent on renovations back. However, in the long term if you intend to stay in your property for a number of years, you may not need to worry about overcapitalisation, as you may still benefit from the renovations by improving your lifestyle and because property prices in the area can fluctuate over time.

Before deciding to take out a home equity loan, make sure that you have researched your options and assessed your current and future financial situation carefully. For free expert advice, chat to a mortgage broker or Lendi Home Loan Specialist today.

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How much equity can you access?


Don't know your property value?
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Got a question?

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: renovate, renovation, home equity loan, equity, home equity, cash out, loan to valuation ratio

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