The different paths to funding a home renovation

When it comes to funding a home renovation, whether a kitchen upgrade, extension or complete remodel, two common ways to access capital include:

• selling investments (like shares or managed funds)
• using an equity release loan (via home loan redraw or loan top-up based on property value)

Each option has its advantages and drawbacks depending on your current financial situation, tax position, and long-term plans.

Here’s a focused comparison for homeowners renovating their primary residence.

Before considering either strategy, it’s important to note that the best source of funds is always surplus cash, i.e. savings that aren’t needed for emergencies or near-term goals.

Using available cash means you avoid triggering capital gains tax (CGT) events, paying unnecessary interest, or reducing your long-term wealth-building potential.

Option 1: Selling investments

This involves liquidating part of your investment portfolio to access funds directly.

Pros:

• immediate cash without loan approval
• no increase in household debt
• no ongoing interest costs
• useful if markets are high or you’re rebalancing your portfolio.

Cons:

• may trigger capital gains tax (CGT) if assets have appreciated in value
• reduces future compounding and potential investment returns (opportunity cost)
• possible timing risk if markets are down
• loss of dividend income and franking credits.

Tax consideration example:

Selling $100,000 in shares with a $40,000 gain and claiming the 50 per cent CGT discount:

• Taxable gain = $20,000
• At 30 per cent marginal tax rate: tax = $6,000

Net cash after tax: $94,000

Option 2: Equity release via redraw or home loan top-up

This involves borrowing against the equity in your home, either through a redraw facility or increasing your home loan amount by the renovation cost.

Pros:

• no need to sell investments or realise gains
• investments can continue to grow over time
• home loan interest rates are generally lower than personal loans or credit cards
• repayments can be structured over a much longer timeframe.

Cons:

• increases your home loan debt
• interest costs add up over time, so the renovation costs more than just the capital works
• interest on loans for personal use (like renovating your own home) is not tax-deductible
• requires lender approval and sufficient equity
• may involve additional lender fees (e.g., valuation, application, or legal costs).

Example:

Borrowing $100,000 at 5.75 per cent interest = $5,750 annual interest cost

If paid down gradually, total cost of renovation depends on repayment strategy.

Special note – redrawing from an investment property to renovate your principal residence

If you redraw funds from an investment property loan to finance renovations on your principal place of residence, the purpose of the new borrowing—not the security—determines the deductibility of interest.

Even though the loan remains secured against the investment property, the funds are used for a private purpose (renovating your home), so the interest is not tax-deductible. The ATO assesses deductibility based on the use of the funds, not the asset securing the loan.

Which option suits renovators best?

The renovation financing option for you

For home owners renovating their own home, the right funding method depends on your tax bracket, investment portfolio, and comfort with taking on (or avoiding) debt.

• If you prefer to avoid debt and markets are favourable, selling investments can simplify your renovation funding.
• If you want to keep your investments intact and leverage your equity—especially while interest rates are reasonable, then equity release may be a better fit.

As always, it’s best to discuss the long-term impacts with your accountant or financial advisor so you can make an informed decision that best suits your circumstance.