When done right, renovating an investment property can be a great way to potentially attract better quality tenants, improve rental return and add value to the property.

But before you start scrolling Pinterest for kitchen inspo or collecting quotes from tradies, it’s worth thinking about how you’re going to pay for it.

The right finance option can make a difference to your cash flow, borrowing capacity and the overall cost of your renovation. And there’s no one-size-fits-all answer, it really depends on the property, the renovation and your financial situation.

 

Personal loan

If you’re planning a smaller, cosmetic makeover, think fresh paint, new flooring, window furnishings or a general refresh, a personal loan could be an option.

You don’t generally need to use the property as security, and the loan amount and repayment term are agreed upfront.

However the trade-off is that personal loans typically have higher interest rates than home loans and shorter repayment periods, so your monthly repayments could be higher.

 

Refinance and use your equity

If your property has increased in value since you bought it, or you’ve paid down some of the mortgage, you may have equity you can access to help fund the renovation.

Equity is essentially the difference between what your property is worth and what you owe on the mortgage.

Depending on your circumstances, refinancing could allow you to access that equity at a home loan interest rate, which is generally lower than a personal loan. It can be worth considering for a larger renovation, just remember you’re increasing the amount you owe on the property.

 

Top up your existing loan

A loan top-up can be another way to access funds without completely refinancing your mortgage.

Essentially, you’re increasing your existing loan to release additional funds for the renovation. This can be a relatively straightforward option, particularly if you’re happy with your current home loan.

As with refinancing, you’ll need to meet the lender’s lending criteria and have enough equity in the property. It’s also important to think about the long-term cost. Spreading renovation costs over a 25- or 30-year loan could mean paying considerably more interest over time.

 

Construction loan

Planning something a little more serious? If your renovation involves structural changes, extensions or a major rebuild, a construction loan could be worth exploring.

Rather than receiving all the money upfront, the lender generally releases funds in stages as different parts of the project are completed.

This can help with cash flow during the renovation, although there can be additional requirements around building contracts, plans and progress payments.

 

Line of credit

A line of credit gives you access to an approved amount of equity, which you can draw down as you need it.

This can provide flexibility if you’re not sure exactly when you’ll need to pay different renovation bills. You generally only pay interest on the amount you’ve actually used.

Of course, flexibility doesn’t mean unlimited spending! Because the facility is secured against your property, it’s important to make sure the repayments remain manageable.

 

Use your own funds

Sometimes the simplest option is to use money you already have sitting in savings, an offset account or redraw.

If you do, make sure you don’t leave yourself completely stretched. Renovations have a habit of uncovering a few surprises, so keeping a buffer for unexpected costs is always a good idea.

 

Let’s talk renovation finance

Whether you’re giving an investment property a quick refresh or planning a major transformation, it’s worth understanding your finance option before the work begins.

At Napoleon Finance, we can help you look at the options available and work out what could make sense for your property, your investment strategy and your cash flow.

 

Thinking about renovating? Let’s have a chat before you pick up the paintbrush.