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Compare home improvement loans
Getting the builders in? Take a moment to compare home improvement loans and find out more about other ways to finance your home renovations.
Home improvements can dramatically improve your quality of life, not to mention increase the value of your property. 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), you’re going to want to look at the smartest ways to finance the work being carried out. Here, we explain some of your options.
What are my options?
An interest-free credit card – borrow up to £5,000.
For smaller home improvements costing below £5,000, say, an interest-free credit card is likely to be 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 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%.
An unsecured personal loan – borrow up to £20,000
Should 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 standardunsecured, 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’re likely to 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.
A secured loan – borrow up to £500,000
For 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 do typically involve product and broker fees, but these can be bundled in with the loan amount.
As the name suggests, the loan must be secured 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.
Remortgaging – borrow up to 90% of your home’s value
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 cost of your home improvements over, say, 25 years, you’ll pay a lot in interest over that time. With any borrowing, you should 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 make your decision:
Home improvement loan Vs. remortgaging
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 two birds with one stone. Whether you opt for a loan or to remortgage will depend on your individual situation, but here are some key differences to consider:
|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 on a case-by-case basis.||The maximum amount you’re going to be able to borrow by remortgaging will depend 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 one and seven 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 for, the more you pay in interest. It’s smartest 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 one and seven 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. There are plenty of mortgages around that offer a fixed rate introductory period, however. Typically this might be for 2 or 3 years.|
|Fees||You don’t have to look too hard to find a personal loan that has no product/set-up fees attached. If there is a fee involved, it’s likely to be relatively small.||Mortgage product/setup 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.|
An equity release “lifetime mortgage” – borrow up to 60% of your home’s value
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.
How to make your renovations pay off
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.
- Add value through creativity. Homebuyers pay particular attention to a home’s bathrooms and kitchen, and without spending too much you can transform a seemingly run-down bathroom or kitchen. When it comes to making cosmetic renovations, it is best to limit to changes that are in plain view.
- Keep a tab on expenses. This is not difficult if you plan ahead of time and then stick to your plan. When budgeting, take into account the cost of materials as well as labour, and spread your budget suitably across the different spaces that you wish to renovate.
- Consider DIY. Undertaking renovations the DIY way can help keep costs in check, but make sure you have access to the right tools as well as the required skills.
- Compare your alternatives. If you take the time to shop around and work on your negotiation skills you can save money on supplies as well as labour costs.
- Think long-term. This is particularly important if you’re making changes to the house you plan to continue living in, simply because you’re the one who’ll benefit. Energy-efficient additions are a definite plus, and by opting to go the green way you can also qualify for certain rebates.
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