How to finance a home extension

If your home is worth $1,000,000 and you owe $600,000, a top-up to 80 per cent gives you $200,000 of borrowing against the current value. If the extension costs $120,000, that covers it with no progress inspections, no builder's contract review and no on-completion valuation. You draw the money and pay the builder as invoices arrive. It is fast and simple, and it only works if the current equity is enough.

For a $300,000 second storey on the same home, the top-up does not stretch. A construction loan values the home as if the extension were complete, say $1,350,000, and lends up to 80 per cent of that, $1,080,000, which covers the existing $600,000 and the $300,000 build with room to spare. The lender wants a fixed price contract, plans and approvals, home warranty insurance and the standard progress payment process. The lender pays the builder in stages after inspection.

Extensions are usually built while you live in the house, which lenders accept. Where the works make the home uninhabitable, the lender treats it more like a knock down rebuild and may ask about living arrangements and rent. Insurance during works matters: your home policy may exclude major renovations, and the builder's contract works policy covers the new work.

Doing the extension yourself as an owner builder moves you into owner builder lending territory: fewer lenders, lower LVR and more paperwork. For extensions under the state owner builder permit threshold, or paid from a top-up in cash, the lender is not involved in the build at all, which is often the simplest route for small owner-managed work.