Borrowing against a renovation
Home improvement borrowing comes in two shapes: unsecured personal credit, priced on your income and record, or secured borrowing against the equity in the property, priced lower but placing the house at risk.
The default scenario reflects the unsecured route. A secured line would typically price several points below this, which is the trade being made.
The formula behind the number
An amortising loan is repaid in equal instalments. Each one covers the interest that accrued since the last payment, and whatever is left reduces the balance. The instalment that brings the balance to exactly zero on the final payment is:
Here P is the amount borrowed, i is the monthly rate (the annual rate divided by 12) and n is the number of payments. Nothing else enters the calculation, which is why two lenders quoting the same three inputs must arrive at the same instalment.
Worked example: $25,000 at 9% over 7 years
The calculator opens on this scenario, so you can follow every step:
- Amount borrowed: $25,000
- Annual rate: 9%, so the monthly rate is 9 ÷ 12 = 0.7500%
- Term: 7 years, so n = 7 × 12 = 84 payments
Paying $402.23 every month for 84 months comes to $33,787. Subtract the $25,000 you actually borrowed and the cost of the credit is $8,787.06, or 35% of the sum borrowed.
Where each payment goes
The instalment never changes, but its composition does. The first payment carries $187.50 of interest and only $214.73 of principal. By payment 42 the split has moved to $110.53 interest against $291.70 principal.
| Payment | Instalment | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $402.23 | $187.50 | $214.73 | $24,785 |
| 2 | $402.23 | $185.89 | $216.34 | $24,569 |
| 3 | $402.23 | $184.27 | $217.96 | $24,351 |
| 42 | $402.23 | $110.53 | $291.70 | $14,445 |
| 84 | $402.23 | $2.99 | $399.23 | $0.00 |
Seven years is longer than many renovations last before needing attention again. Check that the borrowing does not outlive the work it paid for.
What moves the answer most
Two levers change the total, and they do not pull with equal force.
Add one percentage point to the rate and the instalment goes from $402.23 to $415.03, which is $1,075.42 more over the full term. Cut 2 years off the term instead and the instalment rises to $518.96, but total interest falls from $8,787.06 to $6,137.53. If the project genuinely raises the property value, the interest may be recovered on sale — but only some improvements do, and kitchens and bathrooms recover far more than personal-taste work.
What this calculator leaves out
It excludes the cost overrun that affects most renovation projects. Budgeting the loan at the quoted figure, with no contingency, is the most common mistake here.
Related calculators
- After-repair value calculator — whether the work adds what it costs
- HELOC calculator — the secured alternative
- Personal loan calculator — the general unsecured case