The Ultimate Guide to Renovation Loans in Melbourne

For homeowners in Melbourne, the dream of a bigger or more modern home is sometimes tempered by the highly competitive buyers’ market.

Instead of relocating, a growing number of homeowners are choosing to renovate their current properties. This approach means you can improve your home’s value and livability without the significant stress and cost of buying and selling.

However, a major renovation does still require a financial commitment, which is where a renovation loan might be suitable.

What is a renovation loan, and how does it work?

Renovation loans in Melbourne allow homeowners to fund upgrades, extensions or repairs without depleting their savings. Whether it’s a kitchen remodel, adding a bedroom or fixing structural issues, these loans provide a structured way to finance home improvements. 

They differ from a standard home loan in both purpose and, often, how the funds are disbursed. While a standard home loan is a single lump sum for a property purchase, a renovation loan can be structured to release funds in stages. This is particularly useful for large-scale projects, as it ensures you only pay interest on the money you have used, rather than the entire loan amount from day one.

A renovation loan is often tied to your home loan. By using your property as security, you can access more favourable interest rates and repayment terms. 

A common alternative to a renovation loan is using personal loans or credit cards. However, these options typically have significantly higher interest rates, which can make your project far more expensive in the long run.

Types of renovation loans available in Melbourne

There are several types of renovation loans available, each suited to different project scales and financial situations.

Construction loans

For major structural work, such as adding a second storey or a significant extension, a construction loan is ideal. Funds are released in progress payments to the builder at key stages of the project, such as pouring the slab or completing the frame. This can protect you by ensuring the builder meets project milestones before they are paid. It also means you only pay interest on the funds that have been released.

Say you’re adding a third bedroom, ensuite and walk-in robe to your Melbourne home. The lender might release $60,000 after the foundation is complete, $80,000 once the frame and roof are up, and the final $60,000 after lock-up and completion – keeping your repayments in line with actual building progress.

Line of credit loans

A line of credit allows homeowners to draw money as needed, up to an approved limit. This is ideal for ongoing or phased renovations, giving flexibility to pay for materials, labour or unexpected expenses. Interest is only charged on the amount drawn, rather than the full limit, making it a cost-efficient option for projects with uncertain timelines.

For instance, if you’re gradually renovating an older home, a $100,000 line of credit could help you fund projects in stages – such as rewiring, updating the kitchen, and later redoing the bathroom. You might draw $30,000 in year one, another $40,000 the next, and keep the remainder available for contingencies – only paying interest on what you’ve actually used.

Refinancing to release equity

Equity is the difference between your home’s current market value and what you still owe on your mortgage. If your property has increased in value, you can refinance to access this equity and fund renovations. This can provide a lump sum upfront, often at lower interest rates than personal loans or credit cards. It’s especially useful for larger projects, managing cash flow during renovations, or combining improvements with a mortgage restructure.

For example, imagine your home was worth $1.4 million, and you owe $800,000 on your mortgage. That gives you $600,000 in equity. You might choose to refinance and access $250,000 of that to build a large extension, while potentially securing a lower rate and consolidating your repayments into one streamlined loan.

Personal loans

For minor or cosmetic upgrades, a personal loan can be a simple solution. These loans are generally unsecured, meaning you don’t need to use your property as security. Because lenders don’t need to assess your property’s value or manage staged fund releases, the application process is typically faster and more straightforward. While rates may be higher than mortgage-linked options, this simplicity makes personal loans suitable for quick or smaller projects where speed and convenience are a priority.

When should you consider a renovation loan?

The current Melbourne market is competitive. Data from August 2025 shows that while demand remains strong, the number of new listings has not kept pace, with total listings down 4.8% from August 2024, according to SQM Research. 

Supporting this trend, the Australian Bureau of Statistics (ABS) reports that loan commitments in Victoria for alterations and additions reached over 5,000 in the 2024–25 financial year, up 2.4% from the previous year. This demonstrates a growing preference among homeowners to invest in improving their existing properties rather than moving, reflecting both market pressures and the desire for long-term value creation.

Renovating can be a strategic way to enhance your home’s value without entering this fast-moving market.

A renovation loan is a smart choice for homeowners who want to improve their current property rather than compete in Melbourne’s tight housing market. You might consider one when you want to:

• Update an older home to modern standards
• Add value before selling or renting
• Create a more liveable space for a growing family
• Incorporate high-demand features such as extra bathrooms, open-plan kitchens or energy-efficient upgrades
• Undertake larger projects where spreading costs over time is preferable to using savings or higher-interest credit

Key lender requirements and eligibility

When applying for a renovation loan in Melbourne, lenders will assess several factors to ensure the project is feasible and that you can comfortably manage repayments.

Loan-to-value ratio (LVR) limits

Lenders will assess your LVR, which is your loan amount as a percentage of your property’s value. For a renovation loan, they typically assess the LVR based on the post-renovation value of the property, not its current value. 

Proof of renovation plans, builder quotes, and council approvals

You will need to provide detailed plans, including builder quotes, architectural drawings and, for major projects, council approvals. Lenders want to see a clear, well-documented plan to ensure the project is viable and the costs are realistic.

Credit history and income assessment

Lenders will conduct a thorough review of your credit history, income and financial commitments to ensure you can service the loan comfortably.

Pros and cons of renovation loans

Like any financial product, renovation loans in Melbourne have their pros and cons.

Pros

• You can significantly increase your property’s value and liveability. 
• Spreading the cost over time makes large projects more manageable and accessible. 
• You may also access better interest rates than with a personal loan, particularly if you are leveraging your property’s equity.

Cons

• During the construction period, you might have higher interest costs as the loan amount increases. 
• There is the risk of cost blowouts and project delays, which can impact your budget and timeline. 
• The valuation process can be a challenge if the finished product is valued lower than anticipated by the lender.

Steps to applying for a renovation loan in Melbourne

The process of securing a renovation loan can be complex, but working with an experienced mortgage broker can simplify it significantly.

1. Establish your budget and the scope of work: Get a clear idea of what you want to achieve and how much it will cost. Obtain multiple quotes from qualified builders and tradespeople.
2. Gather quotes and required approvals: Collect all necessary documentation, including builder quotes, architectural plans and council permits.
3. Choose the right loan type: A broker will help you compare different loan types – from a construction loan for renovations to a line of credit or refinancing option – and select the one that suits your needs.
4. Submit your application: Your broker will submit your application to the most suitable lender, ensuring all documentation is in place.

Bring your renovation plans to life with the right finance

Renovating your home can add value, improve livability and make the most of Melbourne’s competitive property market. But navigating renovation loans and lender requirements can be complex, particularly when balancing budgets, approvals and repayments. 

Working with an experienced broker like AXTON Finance ensures you access the right loan type, structure your finance effectively and have expert guidance every step of the way – making your renovation project smoother and more secure.

Ready to bring your renovation plans to life? Talk to AXTON Finance about the right renovation loan for your project. Our expert brokers can help you choose the best loan type, structure your finance, and guide you through the application process. Call 03 9939 7576, email [email protected] or get in touch today.