Home improvements
Most people fund a renovation by topping up their home loan, not with a separate personal loan. How you do it depends on how much equity you have and how big the job is.
By Yatin Kainth, Financial Adviser. Last reviewed
The usual way to fund a renovation in NZ is a top-up on your existing mortgage, secured against your home’s equity. It’s normally far cheaper than a personal loan. Small jobs can run through a revolving credit account; large consented renovations may be funded in stages like a construction loan.
It comes down to equity and income. Equity is your home’s value minus what you owe. Most banks lend up to 80% of the value for an owner-occupied home, and the Reserve Bank’s loan-to-value rules apply to top-ups as well as new loans. You also need to show you can afford the higher repayments.
For example, a home worth $900,000 with $500,000 owing has $220,000 available up to 80% ($720,000 less $500,000), if your income supports it.
| Option | Best for | Watch out for |
|---|---|---|
| Mortgage top-up | Most renovations | Spreading a short-term cost over 25+ years if you only pay the minimum |
| Revolving credit | Jobs paid in several invoices, and paying it back fast | Needs discipline, because it’s easy to redraw |
| Staged (construction-style) lending | Big consented renovations and extensions | The bank values the finished home and pays in stages |
| Personal loan | Small jobs when you have no equity | Much higher interest rates and shorter terms |
For larger jobs, lenders may lend against an “as if complete” valuation, which is what the home will be worth once the work is done. Funds are then released as the builder invoices each stage. You’ll usually need plans, the building consent and a fixed-price quote. It’s similar to how construction loans work.
Some work adds more value than it costs, and some doesn’t. Kitchens, bathrooms, insulation and extra bedrooms tend to help. Highly personal touches often don’t. If you might sell in a few years, get an agent’s view before you spend big.
If you have the equity, a mortgage top-up is usually much cheaper because home loan rates are lower. Just pay it back faster than the minimum so a short-term cost isn’t spread over decades.
It’s harder, because Reserve Bank rules limit bank lending above 80% of the value. Some lenders may still help, and a revaluation after recent price growth sometimes frees up more equity.
For consented work, lenders will want to see it before they lend on an as-if-complete basis. For smaller work that doesn’t need consent, a top-up based on your current equity is usually enough.
Yes, many people do. How the loan is structured matters for tax, so talk to your accountant. See using home equity.