What’s the difference between a home renovation loan and a construction loan? How do you decid which option is right for you? And what is the process for applying for renovation loans?
Australia is a nation of builders and renovators. At least, that’s what some of the latest data is saying. According to PropTrack, Australians build around 190,000 new homes each year on average. Australia also ranks third in the world when it comes to interest in home renovations per capita. So, it’s not surprising that we get so many enquiries about applying for a renovation loan or a construction loan.
In this article, we’ll look at the pros and cons of both types of loans and explain how to go about applying for a construction or home renovation loan.
Home Renovation Loan or Construction Loan?
When deciding between a renovation or the construction of a new home it’s important to first assess your specific needs and goals. Factors including budget, timing, location and the current property market will all need to be considered. Additionally, take time to weigh up the flexibility, potential cost savings and long-term investment value of both options.
The decision of whether to build a new home or renovate an existing one will often come down to personal preferences and lifestyle considerations. A thorough evaluation of all these elements will help you make an informed decision about which option will best suit your needs.
What Is a Renovation Loan?
A loan for renovation works is a short-term loan designed for home improvement projects. This could include a kitchen or bathroom renovation, roof repair, etc. A loan for renovation works is available from banks, as well as other lenders. The amount borrowed will vary depending on your proposed project and the lender’s specific requirements.
Unlike long-term mortgages, a loan for renovation works will typically have shorter repayment periods. This means you’ll be able to finance your renovation without committing to extended repayment terms. This aspect of a home renovation loan makes them a practical choice for homeowners seeking immediate improvements with manageable repayment schedules.
What are the Pros and Cons of Home Renovation Loans?
As with any major financial investment, it’s important to evaluate the various pros and cons before deciding what to do. When it comes to a loan for a renovation, some of these include:
Pros of Renovation Loans
- Flexible financing for a range of home improvement projects.
- They’re accessible for existing homeowners looking to upgrade.
- Potential cost savings (when compared to building a new house).
- Faster project initiation and completion.
Cons of Renovation Loans
- May not be suitable if the renovation involves extensive structural changes.
- There’s the potential for unexpected costs during renovations.
- Won’t always cover the full cost of major construction projects.
What is a Construction Loan?
A construction loan is a financial product designed specifically for building new homes from scratch, or for covering extensive, full-scale renovation projects. The purpose of a construction loan is to finance the various stages of building, from the initial permits through to completion.
Unlike traditional mortgages, construction loans provide funds in stages as the project progresses. The benefit of this is that you will only be charged interest on the portion of the mortgage that has already been paid out (not the total value).
What are the Pros and Cons of Construction Loans?
Construction loans can be very beneficial, but they do still have certain limitations. Some of the positives and negatives of construction loans include:
Pros of Construction Loans
- Allows you to build a brand new home tailored to your specifications.
- Potential access to government grants that can help offset costs.
- Ensures compliance with the latest building codes and energy efficiency standards.
- Provides a long-term investment with potential property value appreciation.
Cons of Renovation Loans
- Higher upfront costs and longer project timelines (a new build takes almost a year to complete, on average).
- Planning and coordination challenges.
- Limited negotiating power during the construction phase.
To find out more about renovation loans vs construction loans, book an appointment with an experienced mortgage broker.
Loan for Renovation vs Construction: What Else Should You Consider?
What else should you consider when evaluating whether to renovate an existing house or build a new home from scratch? In addition to weighing up the different finance options available, you’ll also need to think about:
- Current housing market conditions.
- Future resale considerations.
- Environmental and sustainability preferences.
- Personal preferences and lifestyle considerations.
With this in mind, what are some of the pros and cons of renovating an existing house compared to building a new home?
What are the Pros and Cons of Renovating an Existing House?
It’s exciting to start with an old home and remake it in your own vision. However, a renovation can have a huge impact on your lifestyle.
Pros of Renovations
- Your upfront costs will be lower since old houses tend to be cheaper.
- Some older homes are very solid as they were built to last generations.
- It’s easier to re-imagine a house with an existing framework.
- Renovating can significantly increase the value of the property in a short space of time.
- It’s possible to live in the property while renovations are underway (saving you money on rent).
Cons of Renovations
- There are often hidden costs to renovating that will only be uncovered once the project commences, e.g., plumbing issues, old wiring, etc.
- Some old homes may contain toxic materials like asbestos.
- Renovations are noisy, messy and can be quite stressful (particularly if you’re living at the property while works are in progress).
- There’s the risk of overcapitalising by spending more than the property will be worth.
What are the Pros and Cons of Building a New House?
It may seem more expensive at the outset to build from scratch; however, there are grants (especially for first home buyers) that can help offset some of these costs.
Pros of Building
- You can choose a design to suit your needs, without compromising to suit an existing structure.
- You won’t have to worry about hazardous substances or structural issues.
- Everything will be brand new, reducing initial maintenance costs.
- Improvements to the building code have made new homes more energy-efficient.
- You may qualify for government grants and stamp duty concessions to help offset construction costs.
Cons of Building
- There’s a bigger upfront cost.
- Planning a new house from scratch can be overwhelming.
- The project will generally take longer to finish compared to a renovation.
- You won’t be able to live at the property while construction is underway.
- You have limited negotiating power when buying a property off the plan or working with a builder.
How To Get a Home Renovation Loan
If you’ve built up sufficient equity in your existing home, then you may be able to refinance your existing home loan to fund your renovation. Alternatively, for a large-scale renovation or extension, you could take out a construction loan to cover the proposed renovation works. To determine which option is best, make an appointment to speak with a local broker.
The amount you can borrow for your renovation home loan is dependent on several factors, such as your current expenses, income and debts. Most lenders will base the size of your home improvement loan on your capacity to meet your minimum monthly repayments. To find out more about your potential borrowing capacity, try using an online calculator, or better still, book an appointment to speak with a broker.
Professional Lending Solutions: Experts in Renovation Loans
There’s a lot to consider when it comes to choosing between building a new house or renovating an existing one. The key to achieving your construction dreams is to make an informed decision based on expert advice.
At Professional Lending Solutions, we’re your go-to renovation loan specialists. We can answer all your questions, help you weigh up the relevant pros and cons and find the construction or home renovation loan that is best for you. Get in touch today so we can help make your renovation dream a reality.
Phil’s journey from banking to mortgage brokering reflects a career driven by a commitment to personalised service and tailored financial solutions. With a distinguished background in banking, including roles at NAB, ANZ and Lloyds TSB Bank in the UK, Phil spent 12 years developing expertise in personal and commercial finance, while also completing a Bachelor of Business (Finance), followed by an MBA majoring in International Business.