Renovating before refinancing or selling: a scenario

The investor and the plan

A hypothetical property investor, borrowing through a company they control, has found a dated house in an established suburb. The kitchen and bathrooms are original, the layout is awkward and the yard is overgrown. Nearby houses that have been updated appear to sell for noticeably more.

The plan is to buy the house, renovate it over several months and then either refinance onto a longer-term loan and rent it out, or sell it. The investor's bank is slow to assess renovation projects of this kind, so they are also talking to a non-bank lender offering refurbishment finance.

Before committing, the investor walks through the decisions below.

Two values, not one

The first thing the lender explains is that it will look at the property in two states.

The as-is value is what the house is worth today, in its tired condition. The as-if-complete value is a valuer's estimate of what it will be worth once the agreed works are finished to the plans and specification supplied.

Lenders commonly cap the loan by reference to both, along with the total project cost. The investor learns that a high completed value does not on its own unlock a larger loan: the lender also wants the investor's own money in the deal from day one, and it limits how much of the purchase and works it will fund. Our lesson on valuations explains how valuers approach each basis.

The investor enters the purchase price, the works budget and the two estimated values into the LVR and loan-to-cost calculator. It shows the loan as a share of each value and of total cost, so the investor can see which measure is likely to limit the advance. Our glossary explains loan to cost if the term is new.

How the money is released

The lender will not pay the renovation budget upfront. Instead, it funds the purchase at settlement and then releases the works money in stages, each one called a drawdown.

Before each drawdown, the lender usually sends an inspector or a quantity surveyor to confirm that the work claimed has been done and that the remaining budget is enough to finish the job. Only then does it pay the builder's claim, often directly.

For the investor, this has practical effects:

• The builder's payment schedule needs to line up with the lender's inspection process, or the builder may wait for money.
• The first stages of work may need to be paid from the investor's own funds before the lender contributes.
• If the lender's inspector disagrees with a claim, that drawdown may be reduced or delayed.

When costs run over

Renovations of older houses often uncover surprises: rotten framing, outdated wiring, asbestos or drainage problems. The investor's builder has quoted a fixed price for the listed works, but anything outside that scope is extra.

Most lenders size the loan against the agreed budget and expect any overrun to be met by the borrower before further drawdowns. The lender checks the cost to complete at each stage. If the remaining budget has fallen short, it may pause funding until the gap is covered. Some lenders will consider increasing the facility or providing separate overrun funding, as described on our page about cost overrun and GST funding facilities, but that is at the lender's discretion and may need a new valuation.

The investor decides to add a contingency line to the budget and keep a separate cash reserve. The loan cost estimator helps them see how interest and fees on the loan add to the project cost, which matters because a longer build means more interest. The development budget checklist is a useful prompt for cost lines that are easy to miss.

Permits and approvals

The investor wants to move a wall, enlarge a bathroom and add a deck. Some of these works may need council approval, a building permit or certification, depending on the state and the nature of the work.

Lenders commonly ask for evidence of any required approvals before they release funds for the affected works. Unapproved work can also cause trouble later: a valuer may discount it, a buyer's lawyer may raise questions, and a refinancing lender may decline to count it. The investor checks with the local council and a building surveyor or certifier, and asks a lawyer about any approvals the property may already be missing. Where a formal development approval is needed, the timetable may stretch.

Planning the exit before the first tradesperson arrives

The loan is short-term, so the investor needs a clear way out. They consider two:

1. Refinance and hold. Once works finish, a new valuation supports a longer-term loan. This depends on the new lender's view of the completed value, the rent and the investor's ability to service the debt.
2. Sell. The completed house is listed, and the sale repays the loan. This depends on market conditions when the works finish, not when they start.

The investor uses the exit timeline planner to work back from the loan's end date, allowing time for the final inspection, a fresh valuation and either a refinance application or a sale campaign. They also think about what happens if the works run late: interest keeps accruing, and an extension may be needed at a cost. Our lesson on exit strategies and backup exits covers preparing a fallback.

Regulation in this scenario

Because the investor borrows through a company, the loan is generally outside consumer credit law, and the lender may ask for a personal guarantee from the director. An individual borrowing in their own name to renovate a residential investment may be in a different position. Ask the lender how it classifies the loan and get independent legal advice before signing.

Questions the investor asks the lender

1. Which value and which ratio will limit the loan in my case?
2. How many drawdowns are there, and what does each inspection require?
3. What happens if the budget runs short partway through?
4. Which approvals do you need to see before funding the works?
5. What happens if the works or the exit run late?