What Is Cash-Out Refinancing for Renovation?
Cash-out refinancing means increasing your home loan balance above what you currently owe, with the extra funds paid to you in cash. You then use that cash to fund your renovation. Because the funds are secured against your property at home loan rates (~6–7% p.a.), this is far cheaper than a personal loan (12–18% p.a.) or using a credit card.
It's essentially converting the equity you've built up in your home — through repayments and property value growth — into usable cash for improvements that may increase the property's value further.
The Equity Access Calculation (80% LVR Rule)
Most lenders will allow cash-out up to 80% of the property's current value. The calculation is:
(Property Value × 80%) − Current Loan Balance = Maximum Cash-Out Amount
Property value: $750,000
80% of value: $600,000
Current loan balance: $550,000
Maximum cash-out: $50,000
You could refinance to $600,000 total, keep $550,000 to pay off the old loan, and receive $50,000 to fund your renovation. New monthly repayment (at 6.2% over 25 years remaining): ~$3,740 vs $3,430 previously.
Renovation Loan vs Equity Refinance: Which Is Better?
| Feature | Cash-Out Refinance | Construction/Renovation Loan | Personal Loan |
|---|---|---|---|
| Interest rate | ~6–7% | ~6.5–7.5% | ~12–18% |
| Fund release | Lump sum upfront | Progress draws as stages complete | Lump sum upfront |
| Amount available | Up to 80% LVR | Up to 95% of completed value | Up to ~$50,000 |
| Builder required? | No | Yes (licensed) | No |
| Council approval needed? | Sometimes | Yes for structural work | No |
| Best for | Cosmetic renos ≤$150K | Extensions, additions, major structural | Minor works ≤$30K |
Lender Requirements for Cash-Out Refinancing
Lenders treat renovation cash-out differently from standard rate-and-term refinancing. Typical requirements:
- Purpose statement: You'll need to confirm the funds are for renovation (not investment speculation)
- Builder quotes: For amounts over $50,000, most lenders want at least one formal quote
- Council approval (DA): Required if you're making structural changes to the building — extensions, carports, second storeys
- Valuation: The lender will order a property valuation (at your cost) to confirm current value and post-renovation value
- Serviceability: You must demonstrate you can afford the larger loan on your current income
Construction Loan vs Equity Release for Major Renovations
For renovations above $150,000 or any structural work requiring a licensed builder and council approval, a construction loan is usually more appropriate than a cash-out refinance. Here's why:
- Construction loans release funds in stages (slab down, frame, lockup, fitout, completion) — you only pay interest on funds drawn
- Stage payments are tied to builder progress inspections, reducing fraud risk
- Lenders can lend against the "completed value" of the property — giving you access to more equity
- Cash-out refinance is better for cosmetic renovations you can manage yourself
Tax Implications for Investors
If the property being renovated is an investment property, the interest on the cash-out portion (the renovation funds) is generally tax-deductible, as renovation costs improve an income-producing asset. Key points:
- Keep the renovation loan separate (sub-account) so you can clearly identify the deductible portion
- Capital works (structural improvements) are depreciated at 2.5% per year, not immediately deductible
- Plant and equipment items (appliances, carpets, blinds) follow the individual asset depreciation schedule
- If the property is your home (owner-occupier), renovation costs are not tax-deductible
Maximum Release Amounts by Lender Type
| Lender Type | Max LVR for Cash-Out | Max Cash-Out Amount | Notes |
|---|---|---|---|
| Major banks (Big 4) | 80% | Typically up to $500K | Serviceability assessment required |
| Mutual banks / credit unions | 80% | Varies ($100K–$300K) | More conservative; may require quotes |
| Non-bank lenders | 80–85% | Up to $500K+ (LMI above 80%) | More flexible on purpose |
| Private lenders | 65–70% | Varies | Higher rates; used for bridging scenarios |
Frequently Asked Questions
Find Out How Much Equity You Can Access
We'll calculate your accessible equity and compare lenders to find the best cash-out refinance rate for your renovation.
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