Home improvements can dramatically improve your quality of life and increase your property’s value. With eye-watering house prices and moving costs, home improvements are becoming an increasingly popular alternative to trading up.
However, unless you have enough stashed away in savings (and many of us don’t), look at the smartest ways to finance the work being carried out. Here, we explain some of your options.
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For smaller home improvements costing below £5,000, say, an interest-free credit card is likely the cheapest option. Credit limits are tailored to the individual – if you have a high credit score and a high income, you may even be offered a limit of up to perhaps £10,000.
A 0% purchase card lets you spread the cost of any card purchases you make in your first few weeks or months of having the card without incurring interest. You could enjoy 2 years or more interest-free, but after that, interest kicks in, so aim to clear your balance before then.
Alternatively, a 0% money transfer card enables you to move funds from your credit card into your current account to spend however you wish (handy if you’re paying any contractors in cash, for example). Again, interest won’t be charged for a set number of months, but you will usually incur a transfer fee of 3-4%.
Check 0% card eligibilityShould you need to borrow more than a credit card can offer, your next best bet is a loan. There’s no such thing as a specific “home improvement loan” – instead, you’ll need to take out a standard unsecured personal loan. These are available from a range of lenders – including banks, building societies and supermarkets. The loans typically max out at £25,000, but to borrow that much, you’ll likely need excellent credit, a high income and, potentially, an existing relationship with the lender. Some high street banks will even stretch to £50,000, but for that, you’ll definitely need to be an existing customer.
Unsecured personal loans are usually fee-free and involve a fixed interest rate – and, therefore, fixed monthly repayments. You can typically spread repayment over 1-7 years. Generally speaking, the longer the loan, the lower the monthly instalment, but the greater the overall cost.
As personal loans are “unsecured”, the lender does not need to use an asset such as a property as collateral.
Check personal loan eligibilityFor extensive home renovations like an extension – requiring more than £20,000 – you may opt to take out a secured loan. Also known as a “second-charge mortgage”, this type of loan allows you to borrow much larger sums over terms as long as 25 years, potentially at more competitive rates than unsecured loans. Secured loans typically involve product and broker fees, but these can be bundled with the loan amount.
As the name suggests, you must secure the loan against an asset – usually your home. This means that if you don’t keep up with your repayments, the lender can force the sale of your home to recoup its money.
When you’re borrowing this much, you may just prefer to remortgage. Secured loans are popular with those who, for whatever reason (perhaps an amazing mortgage rate or a damaged credit profile), don’t want to disrupt their mortgage.
The amount you can borrow will be limited by how much equity you have in your house. You’ll usually need to have at least 20% to 25% equity, but the more you have, the better. You can work out how much equity you have in your home by dividing your mortgage’s outstanding balance by your home’s current market value. This gives you your loan-to-value (LTV) ratio. If your LTV was 80%, you’d have 20% equity.
Remortgaging, AKA refinancing, can be a good option if you believe you have a decent amount of equity in your home and want to unlock it to fund home improvements. It essentially involves terminating your existing mortgage agreement and starting a new one with different terms. It generally makes sense to remortgage every few years anyway – since most mortgages offer favourable terms to start with but then revert to the lender’s not-so-competitive “standard variable rate”. If you’re on a shocking rate at the moment, then who knows – you could even be able to unlock the equity you need without it impacting your monthly repayments (at least initially).
There are plenty of bear-in-minds to remember when you’re remortgaging. But perhaps one of the most important is that if you opt to spread the home improvement costs over, say, 25 years, you’ll pay a lot in interest. With any borrowing, aim to keep costs down by paying as much as you can afford in each instalment and getting debt-free as fast as you can.
Below are some key differences between personal loans and remortgaging to help you decide:
If you’re a homeowner, you may wish to consider remortgaging as an alternative to a home improvement loan. Generally, it makes financial sense to switch your mortgage periodically – for example, when an offer period has expired, so while you probably don’t want to get sidetracked, remortgaging could even be killing 2 birds with 1 stone. Whether you opt for a loan or to remortgage depends on your individual situation, but here are some key differences to consider:
| Personal loan | Remortgaging | |
|---|---|---|
| Loan security | Personal loans are normally unsecured and, therefore, represent a higher risk to a lender. This, in turn, normally leads to a higher interest rate for you, the borrower. | Because mortgages are secured loans, they often come with lower interest rates than other forms of credit. The small print is there for a reason, though: your home may be at risk if you do not keep up repayments. Remember that most mortgages consist of a competitive rate during an offer period but then tend to revert to a less competitive “standard variable rate”. |
| Loan amount | Unsecured personal loans are typically capped at £25,000. Some lenders will stretch to £50,000, but you’ll normally have to be an existing customer (or willing to switch your current account). The loan amounts are always subject to approval and will be considered case-by-case. | The maximum amount you can borrow by remortgaging depends on factors such as the amount of equity you have in the property (how much of it you own), the value of the property and personal circumstances such as your age, credit score, income and expenditure (and that of any other people whose names would be on the mortgage). Potentially, though, remortgaging could give you access to larger sums than a personal loan. |
| Loan term | Personal loans last for a fixed period – typically between 1 and 7 years. Generally speaking, borrowing over shorter periods means paying less in interest overall, even if the annual rate isn’t as good. | Mortgages can obviously last a lot longer than personal loans, and as a rule of thumb, the longer you borrow, the more you pay in interest. It’s best to consider the “total amount payable” on the amount you borrow. |
| Repayment amounts | With a fixed-rate personal loan, you’ll pay the same amount each month and pay off your loan over a pre-arranged period, typically between 1 and 7 years. | If you’re spreading the cost of your home improvements over 20 years or more, for example, then naturally, your effective monthly repayment on the home improvements will be less than if you only borrowed for a couple of years. The downside is that you’ll pay more in interest overall. |
| Fixed/variable rates | Personal loans almost always charge interest at a rate that’s fixed for the duration of the loan, which can be helpful for budgeting. You should confirm whether or not this is the case before you apply. For some people, the peace of mind that a fixed rate offers is paramount. | Because mortgages can cover terms as long as 35 years (or, in rare cases, even more), lenders are understandably not likely to fix the interest rate for the duration of the loan. However, plenty of mortgages offer a fixed-rate introductory period. Typically, this might be for 2 or 3 years. |
| Fees | You don’t have to look too hard to find a personal loan with no product/set-up fees attached. If a fee is involved, it’s likely to be relatively small. | Mortgage product/set-up fees vary much more than personal loan fees – it’s not unusual to come across product fees of £1,000 or more. |
| Ease | Personal loans can be applied for, approved and drawn down in minutes. More often, it will take a day or so. | Realistically, remortgaging takes a while – undoubtedly longer than a personal loan. On the other hand, it is something that you’re likely to want to do every few years anyway. |
If you’re aged 55 or over and a homeowner, you could also consider taking out an equity release product such as a lifetime mortgage or home reversion plan. Again, these allow you to release equity (wealth) built up in your home to give you tax-free cash to spend on home improvements (or anything else).
A lifetime mortgage lets you free up equity from your property that you don’t have to pay back until you (and your partner, if you own your home jointly) die or go into long-term care.
All the time you’re borrowing money, interest accumulates – so you’re soon paying interest on interest. This makes it an expensive way to borrow, and as such, it’s not a decision to enter into lightly.
Lifetime mortgages can provide you with a one-off lump sum or can be drawn down at regular intervals. Depending on the terms of the specific mortgage, you may have the option to make repayments should you wish.
Before you begin renovating your home, establishing the purpose is very important. Do you, for instance, want to renovate your home to enhance your lifestyle? Do you want to make more money from renting it out, or do you plan to sell it? While carrying out a feasibility study in the second and third scenarios is crucial, ensuring that you don’t overspend is important, irrespective of why you want to renovate.
There are several options to consider if you’re looking to finance home improvements. A credit card may be a more affordable choice for smaller projects. However, if you require additional financing, an unsecured or secured loan may be more suitable depending on your situation. Another option is remortgaging, which could provide funding for home improvements. As always, before taking out a loan, ensure you can make the repayments, as failure to do so could lead to financial difficulties and damage your credit score.
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