The Gippsland Rotary Centenary House will build 13 extra rooms in its stage three expansion following the announcement of $900,00 in federal funding.
Prime Minister Malcolm Turnbull made the announcement at the house on Thursday, describing the facility as "the house that love built".
"I'm glad we were able to bring some love from Canberra, not normally known for exporting love," he said.
The funding for the Rotary House is part of a $20 million regional jobs and investment package.
Rotary Centenary House Committee of Management chair Ken Peake said expansion plans for the Latrobe Regional Hospital had made it clear the House also needed to expand.
"It was in response to a meeting the Committee of Management had with the chief executive officer at the hospital, who told us they are working on a business plan for ... a redevelopment," he said.
"He said 'you better put in as many rooms as you can'."
Mr Peake said Centenary House had obtained a planning permit and would be applying for building permits shortly.
"The hospital cooperates with us fully," he said.
"They recognise the benefit this house does to the hospital in delivering regional health because if people don't have a place to stay, they won't come."
Federal member for Gippsland Darren Chester said Centenary House was "home away from home" for patients and their families undergoing treatment at Latrobe Regional Hospital.
"Not only does it provide affordable accommodation, it provides a place for patients and their families to support each other through the challenging times," Mr Chester said.
"Gippsland Rotary Centenary House is based in the Latrobe Valley but benefits enormously from the fundraising efforts of Rotarians across Gippsland, who appreciate the importance of this facility to those who must travel to receive treatment at Latrobe Regional Hospital.