Australians have an ongoing mission to renovate. The rate of home renovations increased 147 per cent from 2010 to 2014 and the renovation shows are TV ratings winners.

There are many reasons for renovating but whether you do it to sell a house or make a home more comfortable, you’re doing it for capital improvement. With such low interest rates, if you have been considering a renovation now is a good time to get it done.

Before you get started though it’s worth noting that many renovators fail to make the gains they envisioned. This happens because they either spend too much, take too long or they make incorrect assumptions about valuations.

These are some things you should know before you break out the hammer. First, get an understanding of what adds value. Renovations that are most likely to improve the value usually centre on the kitchen, bathroom and garden. Extra bedrooms, bathrooms, and certain fittings are effective too, but the basics hold true in most markets. Another rule of thumb is your spending ratio: ideally a renovation shouldn’t cost more than 10 per cent of the property’s value. If you go over this basic budget limit, you should be clear the required uplift in valuation might not be achieved.

Also exercise caution in your plans: before going too far, ensure that what you’re proposing has council approval. Remember that in residential areas, the lower the value of the renovation, the more likely it is to be approved.

Once you decide that you want to proceed, you’ll need to determine how you will finance the renovation. There are two options that people generally take – equity or a construction loan. Ideally you use equity from your existing property, and some of your cash, to fund the renovation. When you use equity and cash to finance a renovation, you’d typically refinance your home loan, or use features in your home loan such as redraw, line of credit and offset account, to access the equity.

Doing it this way gives you more control over your funds, your timetable and the tradies you use – than a construction loan. However, if accessing equity isn’t an option for you, then you can consider a construction loan. It gives more control to the lender but can still be a suitable solution. It provides certainty to the borrower by writing the loan against the property’s renovated valuation, taking a lot of risk away from the property owner.

The lender deals directly with the builder and pays the builder in stages, holding the builder to milestones and a schedule. Interest on a construction loan is only paid on the drawn-down stage payments. Neither option is fast – they involve plans, building contracts and valuations. You have to be patient.

If you’re unsure, a mortgage broker is a smart step. They can advise which option will best suit your needs and help you select the best deal on your loan.

Whatever route you take on your renovation, remember this: the most valuable part is usually the extra time spent doing your homework. Good luck!

Posted by Mark Bouris – The Age on 15th May, 2015