Top tips to fund a renovation project in Croydon

Buying a home that needs renovation means you're looking at two transactions at once: the purchase itself, and the funding to fix it up. A construction loan structures both into a single approval, releasing funds progressively as the work gets done.

How a purchase and renovation loan works

You're borrowing enough to cover the purchase price and the full cost of the renovation. The lender settles the purchase amount on settlement day, then holds the renovation portion in reserve. Funds for the build are released in stages as your registered builder hits agreed milestones, and you only pay interest on what's been drawn down so far.

In our experience, buyers in Croydon often target properties on larger blocks near McAdam Square or around Croydon Hills that need updating but sit on substantial land. The property might settle at one price, but the loan approval reflects both the purchase and the planned renovation, so your borrowing capacity needs to stretch across both.

What lenders look for in a renovation project

Lenders want to see council approval for the work, a fixed price building contract from a registered builder, and a clear progress payment schedule. You'll submit plans that show what's being built or renovated, and the lender's valuer will assess the property's value once the work is complete, not just its current condition.

Consider a buyer who purchases a weatherboard home in need of a full interior update and extension. The purchase price might sit below the suburb median, but the post-renovation value needs to support the total loan amount. The lender assesses the finished value, and if that stacks up, they'll approve the combined loan amount. If the valuation falls short, you'll need to either reduce the scope of work or bring in more deposit to cover the gap.

The progressive drawdown process

Once the builder starts, funds are released according to the progress payment schedule in your building contract. Typical stages include slab down, frame up, lock-up, fixing, and practical completion. Before each payment, the lender arranges a progress inspection to confirm the stage is complete, then releases that portion of the funds directly to the builder.

You'll pay interest only on the amount drawn down so far, which keeps repayments lower during construction. Most lenders also charge a progressive drawing fee, usually a few hundred dollars per inspection, to cover the cost of the valuer attending site. Construction loans structured this way give you control over how funds are released and protect you from paying for work that hasn't been completed.

Fixed price contracts and cost protection

A fixed price building contract locks in the total cost of the renovation before you start. Lenders won't approve a cost-plus contract for this type of loan, because the final bill isn't known upfront. The contract needs to break down the full scope of work, the agreed price, and the stage-by-stage payment schedule.

That contract also protects you. If the builder quotes $150,000 for the renovation and you've borrowed that amount, the builder can't come back mid-project asking for more unless you agree to variations. Any additional work you approve will need to be funded separately, either from your own savings or by increasing the loan if the lender agrees and the valuation supports it.

Timing and settlement considerations

Most lenders require you to commence building within a set period from the loan settlement date, usually six to twelve months. If you settle the purchase but don't start construction within that window, the lender may require you to refinance the renovation portion or withdraw the approval altogether.

You'll also need council approval in place before settlement. Some buyers in Croydon purchase a property subject to council approval for their development application, but if that approval doesn't come through, the finance falls over. It's worth getting the DA sorted early, especially in areas around Croydon where planning overlays or heritage considerations can extend approval timeframes.

Interest-only repayments and the construction phase

During construction, most buyers opt for interest-only repayments on the amount drawn down. Once the build is complete and the final drawdown is released, the loan converts to principal and interest repayments based on the full loan amount. That conversion happens automatically, and your repayments will increase to reflect the total debt.

If you're also living in the property during the renovation, you'll be paying interest on the purchase portion from settlement day, plus interest on each construction drawdown as it's released. Refinancing after the project is complete can sometimes secure a lower rate or better loan structure, particularly if the finished property value has increased and your loan-to-value ratio has improved.

What happens if the project runs over budget

If the builder identifies unforeseen work during the renovation, you'll need to cover that cost yourself unless you can increase the loan. Lenders will only consider an increase if the updated valuation supports the higher loan amount and your borrowing capacity allows for it. That's why it's worth building a buffer into your savings before you start, particularly with older homes in Croydon where structural issues or outdated wiring can add unexpected costs.

In a scenario like this, a buyer purchasing a 1960s brick veneer home near Eastfield Park might plan a $120,000 renovation, only to discover asbestos removal or stumps that need replacing. If the buyer doesn't have the cash to cover that work, the project stalls. A loan health check before you commit to the purchase can help you understand how much buffer you have in your borrowing capacity if things don't go to plan.

Owner builders and construction finance

If you're planning to manage the renovation yourself as an owner builder, most mainstream lenders won't offer construction finance. They require a registered builder with appropriate insurance to be named on the contract. Some specialist lenders will consider owner builder finance, but the interest rate is higher, and the approval process is more involved.

You'll still need council plans, a detailed cost breakdown, and proof that you have the skills or trade qualifications to manage the project. Even then, the lender will want to see that major trades like plumbers and electricians are licensed and insured. Owner builder finance is less common for purchase and renovation projects, and you'll have fewer lenders to choose from.

Call one of our team or book an appointment at a time that works for you. We'll structure the loan to match the project, walk you through the drawdown process, and make sure the numbers work before you commit to the contract.

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