The Pros and Cons of Using Home Equity to Renovate

Using your home equity to renovate can work well, but it means borrowing more against your house and paying it off over a long time. If you are a plumber thinking about a new bathroom, kitchen or extension, here is what you gain and what it costs.

What Does It Mean to Release Equity for a Renovation?

Releasing equity means borrowing against the part of your home you have already paid off or that has grown in value. You can do it by topping up your current loan or by refinancing your home loan to a larger amount.

Equity is the gap between your property value and what you owe. Lenders usually look at your loan to value ratio (LVR), which is your loan divided by the property value. The usable equity you can access depends on the lender, your deposit size and your income. Our equity release loans for tradies page covers how this works for trade workers.

The Pros: Why Plumbers Use Equity to Renovate

The main upside is that home loan rates are usually lower than personal loan or credit card rates, depending on your lender and LVR. A renovation can also add value to your home if the work suits the property and the area.

There are a few other practical benefits:

• You borrow one lump sum, or a set amount, and avoid juggling credit cards and supplier accounts.
• Your trade skills may let you do some of the work yourself and cut labour costs.
• You can often pair a refinance with a rate review, so you are not just adding debt on top of an old loan.

If you want to check whether your current rate is still fair, see our page on getting a lower interest rate.

The Cons: What Borrowing More Really Costs You

The biggest downside is that you pay interest on the extra amount for as long as it sits in your loan. A renovation spread over 25 or 30 years can cost far more than the amount you borrowed.

To see the effect, use an illustrative rate of 6.75% p.a. Borrowing an extra $50,000 over 30 years at that rate costs roughly $324 a month in repayments. That is a rough figure, so check it with a calculator before you decide. You will also pay interest on a renovation long after the new tiles have worn in.

Other costs and risks to weigh up:

• Your LVR goes up. If it passes 80%, some lenders may charge lenders mortgage insurance (LMI) or limit your options.
• Refinancing can come with discharge fees, application fees or valuation fees, depending on the lender.
• If property values fall or the work does not add value, you could owe more than the renovation is worth.
• Higher repayments leave less room if work slows down.

Example: A Plumber Who Topped Up for a Bathroom and Kitchen

Consider a self-employed plumber with a home loan, a growing family and a dated bathroom and kitchen. A quote comes in at $50,000. Their lender will not lift the limit on their current loan, and the rate is higher than what other lenders are offering.

They speak to a broker and refinance to a new lender with a larger loan amount. The broker compares lenders that accept self-employed income, and the plumber supplies tax returns and BAS statements. Because the loan is for renovation, the plumber also keeps invoices and quotes handy, as lenders may ask about the use of funds.

The outcome in this scenario: the plumber borrows the extra $50,000, pays for the work in stages, and does the plumbing rough-in and fit-off themselves to save on labour. At the illustrative 6.75% p.a., the extra borrowing adds about $324 a month. They set up an offset account and put spare cash from larger jobs into it, which reduces the interest charged. The trade-off is a bigger loan for the long haul, and the plumber accepts that in return for a home that suits the family. Your own numbers will differ, and a lender will assess your situation individually.

How Self-Employed Plumbers Get Assessed

Self-employed plumbers are assessed on their income from tax returns, business financials or, with some lenders, alternative documents. Lenders look at how stable your income is, so a lumpy year can affect how much you can borrow.

If your paperwork is not up to date, you may want to explore self employed loans for tradies or low doc loans for tradies, which suit different income setups. Low doc loans often carry higher rates and tighter limits, so weigh that cost up. You can also test what you might borrow with our borrowing capacity page.

Is a Cash Out Refinance Right for Your Renovation?

A cash out refinance suits you if the renovation is worth doing, you can comfortably afford the higher repayments, and the new loan terms are not worse than your current ones. If any of those fail, wait or borrow less.

Before you commit, ask yourself:

• Would the repayments still be manageable if work dropped off for a few months?
• Will the renovation add value, or is it mainly for your own comfort?
• Would a smaller top-up or staged work do the job?

If you are also paying off other debts, you might look at debt consolidation loans for tradies. Rolling short-term debts into your home loan can lower repayments now, but you may pay more interest over the longer term. Our renovating your house page also covers how to plan the work.

A broker who works with finance for tradies and home loans for tradies can compare lenders for you and show you the numbers before you commit.

Call one of our team or book an appointment at a time that works for you. We will look at your equity, your income and your renovation plans, and tell you straight whether refinancing makes sense.

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