A lot of the renovation calls we take start the same way. The owner has a quote from a builder, a rough idea of what the house is worth, and no idea whether to ask the bank for a top-up or something else. The answer depends less on the size of the job than on what you are actually doing to the house.

Three ways people usually pay for it

  • Redraw or offset. If you have been paying ahead, the money may already be sitting in your loan. It is the cheapest option because there is nothing to apply for.
  • An equity top-up. You borrow more against the house you already own, often as a separate loan, and spend it as you go.
  • A construction loan. The lender releases the money in stages as the work is finished, and values the house on what it will be worth once the job is done.

When a top-up is enough

For a kitchen, a bathroom, new floors or a repaint, a top-up is normally the simplest route. The work is cosmetic, you can see the cost, and the lender is mainly looking at your income and the equity in the property. If you need to understand that second part first, start with our guide to how much equity you can use.

The catch is that a top-up pays out as a lump sum. If the job runs over or you change your mind halfway, the money is already in your account and so is the interest.

When you need a construction loan

Once the work changes the structure, it is a different animal. Adding a second storey, extending the back of the house, putting in a pool or knocking the place down and starting again all need approved plans and a fixed-price contract or a detailed quote, and lenders treat them as construction. The money is drawn down at set stages: slab, frame, lock-up, fit-out and completion. Each draw usually needs a progress inspection first.

That sounds like paperwork, and it is, but it protects you as well. You only pay interest on what has been drawn. We cover how it works for a full rebuild in our guide to knockdown-rebuild loans on the Northern Beaches.

What the lender wants to see

  • Council approval or a complying development certificate, where the work needs it.
  • A signed contract from a licensed builder, or a detailed costed quote.
  • Plans and a schedule of works the valuer can use.
  • Evidence you can afford the repayments on the new, larger debt, and the ones on the old loan if you are keeping it.

Heritage and conservation areas, steep blocks, waterfront and flood-affected land all add steps. We see a lot of this around Hunters Hill, Castle Cove and Balgowlah Heights, and the lenders that are comfortable with it are not the same ones that are comfortable with a flat block in a new estate.

The valuation is where it can go wrong

For a construction loan the lender values the finished house, not today's. That is called an on-completion valuation, and it can come in lower than you hoped, particularly if you are spending heavily on a street where nothing similar has sold. A lower number shrinks how much you can borrow. It is worth checking before you sign with the builder, not after.

Do not forget the gap

If you are living in the house while it is being worked on, fine. If you have to move out, you are paying rent as well as the mortgage, often for longer than the builder said. Build a buffer into the borrowing for it. Contingency is boring until the day you need it.

A quick way to choose

  • Cosmetic and under a manageable amount? Look at redraw, then a top-up.
  • Structural, or council approval needed? Plan for a construction loan.
  • Not sure of the final cost? Ask for a staged approach, so you are not borrowing money you may not use.

If you would like someone to look at the quote and the numbers with you, get in touch or call 1300 001 755. We are licensed credit advisers based in Forestville, and we do this regularly for owners in Hunters Hill, Castle Cove, Balgowlah and Frenchs Forest.

Frequently asked questions

Is it better to renovate with a top-up or a construction loan?

It depends on the work. Cosmetic jobs are usually simplest with a top-up. Structural work such as an extension or a second storey normally needs a construction loan, where the money is released in stages.

Can I use my equity to pay for a renovation?

Often, yes. The lender looks at the property's value, what you owe and whether you can afford the extra repayments. How much you can use is covered in our equity guide.

Do I need council approval before I apply?

For structural work, lenders usually want to see approved plans or a complying development certificate, plus a signed builder's contract, before they will release funds.

What is an on-completion valuation?

It is the lender's estimate of what your property will be worth once the work is finished. It sets the limit on what you can borrow for the project.

General information only. It does not take your objectives, financial situation or needs into account, and it is not credit or financial advice. Lender policy, rates and eligibility change regularly and vary between lenders — talk to us about your own circumstances before acting on anything here.