Construction loan or equity release? Two ways to fund your renovation
If you are planning a major renovation you have two primary ways to pay for it. Most people assume they need a construction loan but for many homeowners an equity release is the smarter move. Whether you are renovating your family home or updating an investment property, here is how each option works.
The construction loan
This is a specialised loan where the bank controls the flow of money. They base the maximum loan amount on 80% of the end value of the property after renovation, minus any existing loans you hold on it.
The process: The lender releases funds in stages such as slab, frame, and lock up, paid directly to your builder.
The upside: Cash flow is controlled because the lender manages the releases. There is no risk of accidentally spending the renovation budget on something else.
The downside: It is rigid. Lenders have set guidelines for the percentage cost of each stage relative to the total build cost and generally limit the number of stages to five or six. This can frustrate builders who want to be paid on their own schedule. The bank also typically requires a valuation inspection before releasing each payment, which can slow down progress on site.
Equity release
This involves increasing your current mortgage to access cash. You borrow against your home's current value and the funds go directly into your own account.
A useful approach is to park the funds in your offset account to reduce interest on the increased loan, then draw from that pool as the renovation requires.
The process: We establish the current value of your home. You can typically borrow up to 80% of that value.
The upside: Total control. You pay the builder, the plumber, and the landscaper yourself. No waiting for bank inspections or progress payment approvals.
The downside: You are responsible for the budget. If the funds sit in your account, they are accessible for anything. It requires discipline.
Which option suits your situation?
It often comes down to two questions.
Do you have enough usable equity in your property to cover the entire build?
How comfortable are you managing cash flow and accessible funds independently?
One reality worth planning for: it is rare for a build to come in exactly on budget regardless of how experienced the builder is. You might change your mind partway through, upgrade fixtures, or uncover something unexpected like asbestos. Having a contingency fund of 10% to 20% is a sensible buffer to establish before the project starts.