What is a home improvement loan?
A home improvement loan, or home renovation loan, can help you fund improvements to your home and potentially increase its value. With a home improvement loan, you could get the money you need to cover renovating your home, then pay off what you borrow in monthly instalments.
Home improvement loans typically come in the form of an unsecured personal loan. But you can also secure the loan against an asset like your home, which usually allows you to borrow larger amounts.
How do home renovation loans work?
- Compare deals – look at interest rates, monthly payments, any fees and the cost of your loan overall.
- Apply for the loan – if you’re approved, the money could be in your account within days, possibly the same day if you’re an existing customer.
- Fix up your home – use the lump sum to finance improvement projects that make your home better suited to your needs and potentially increase the property’s value.
- Repay the loan – pay back the loan in fixed monthly repayments. You can choose to pay it off early, but you might face an early repayment charge.
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What are the different types of home refurbishment loan?
There are technically three types of home improvement loan to consider: an unsecured loan, a secured loan and a guarantor loan. However, an unsecured and secured loan are the most common. Here’s how they work:
Unsecured home improvement loan
Also known as an unsecured personal loan, this type of loan allows you to borrow without putting up an asset, like your car or house, as security.
Things to consider with an unsecured personal home improvement loan:
- Approval is based on your ability to pay back the loan, so lenders will want to check that you have a good credit history. You may also need to show you have a regular income.
- Can be a good option if you’re planning to spend around £1,000 to £25,000 on a smaller project, such as updating your kitchen.
- You don’t risk losing your home, but failure to make the repayments could result in a County Court Judgment (CCJ) against you.
- Because the loan is unsecured, you might not be able to borrow as much as you would with a secured loan.
Secured home improvement loan
Also known as a homeowner or home equity loan, this type of loan allows you to borrow a larger amount of money using the equity, or the value, of your home as security.
Things to consider with a secured home improvement loan:
- Suitable for major renovation projects. Depending on your credit history and financial situation, you might be able to borrow up to £100,000 or even more.
- Interest rates are often lower and fixed over a longer period, which helps with budgeting.
- Your house could be repossessed if you fall behind on repayments.
Home improvement guarantor loan
A guarantor loan is a type of unsecured personal loan that’s guaranteed by another person – typically a family member. They guarantee to take over repayments and honour the debt if you’re not able to pay back the loan.
Things to consider with a guarantor home improvement loan:
- Could be a last-resort option if you’re unable to get a loan, either because you have bad credit or a limited credit history.
- You’ll need someone with a good credit history to act as a guarantor, and it’s a big financial risk for someone to take on.
- Guarantor loans tend to have higher APRs than standard unsecured personal loans.
What are the pros and cons of a home improvement loan?
Home improvement loans offer the following benefits:
- Get started sooner: you won’t need to wait until you can save up to start your renovation project.
- Quick access to your money – applying for an unsecured loan can be surprisingly quick, although secured loans typically take a little longer. Once approved, you could have the money for your renovation project in your bank account within days; in some cases, just 24 hours.
- Easier to budget – a loan with a fixed interest rate helps you to budget for your monthly repayments.
- Choose the length of your loan – the repayment period for a home improvement loan can range from one to 10 years.
- Choose the amount you want to borrow – but always be sure you can afford the monthly repayments.
- Choose how you spend your money – in most cases, you don’t have to specify what you want the money for. If your project comes in under budget, you could use the rest of the loan on something else.
- Add space and value – a loan for house extensions allows you to add space for your growing family, while potentially increasing the value of your property.
The potential downsides of a home improvement loan include:
- Penalties – if you don’t make the repayments on time, you’re likely to be charged a penalty. Failing to make payments or defaulting on the debt could also seriously impact your credit score.
- Home repossession – if you secure your loan against your property and fail to keep up with your repayments, the lender can repossess your home and sell it to recover the debt.
- Higher costs – you’ll have to pay interest on what you borrow so your project could end up costing you more than if you waited and saved up.
- Interest rates – are you comfortable with the amount you’ll have to pay each month? Unsecured loans typically come with higher rates of interest than secured loans.
- More expensive to borrow if you have bad credit – if your credit score is low, the loans you’re likely to be approved for may have higher interest rates.
- Home valuation – you might not improve the value of your home equal to the amount you’ve spent on the improvements.
What should I consider when choosing a home improvement loan?
Before deciding on the best home improvement loan for you, consider:
- How much you need to borrow: the bigger the loan, the more you’ll pay in interest. Only borrow what you need.
- The interest rate: the best loans for home improvements are those with the lowest interest rates. With a fixed interest rate, your payments will stay the same until the loan is paid off. With a variable rate, your monthly payments could go up or down.
- The loan period: it could cost you less to borrow overall if you choose a shorter loan term, but make sure you can afford the repayments.
- Any fees: depending on the type of loan you choose, you may have to pay fees as well as interest.
- Your monthly payments: homeowner loans typically offer longer repayment terms than unsecured personal loans, which can mean lower monthly repayments. But because you’re paying back the loan over a longer period, you may pay more in interest overall.
- Your credit rating: if you’re a homeowner with a less-than-perfect credit history, you might find it easier to be approved for a secured loan as your house can be used as security.
- Early repayment penalties: some lenders will charge you for paying off the loan early, so make sure you read the small print.
How can I find a home improvement loan?
The good news is that it’s easy to compare home improvement loans with us. Just answer a few questions and we’ll show you which loans you’re likely to be approved for, without impacting your credit score.
- How much you want to borrow
- How long you want to repay for.
Frequently asked questions
Can I add a home improvement loan to my mortgage?
Yes, by remortgaging, you can apply to increase the mortgage amount, pay off your existing mortgage and use the additional amount to fund renovations or home improvement projects. How much extra you can borrow will depend on how much equity you have in your home.
If you decide to remortgage to finance home improvements, be aware that borrowing more is likely to increase your monthly mortgage repayments. You’ll also need to pay your mortgage for longer.
What’s the difference between a home equity loan and a home improvement loan?
A home equity loan, or homeowner loan, is secured against your home. A home improvement loan is typically unsecured. That means it’s approved on your perceived ability to pay back the loan, based on your credit history and income.
With a home equity loan, you can borrow against the equity you have in your home. For example, if your home is valued at £500,000 and you have £100,000 outstanding on your mortgage, the equity is £400,000.
A home equity loan may allow you to borrow more than you could with an unsecured home improvement loan. However, it’s important to remember that if you fail to keep up with the repayments, you could lose your home.
Can I get a joint home improvement loan?
If you apply for a joint home improvement loan, you’ll both be subject to the standard credit checks so it’s important that you each have a good credit rating. As a pair, you may be eligible to borrow a larger amount.
Can I get a home improvement loan with a bad credit score?
It’s possible to get a home improvement loan with a poor credit history, but you’ll probably have less choice and face higher interest rates. Depending on your credit rating, the lender may also want you to use your home as security for the loan. And if you can’t make the loan repayments, you risk losing your home.
Before you apply for a loan, it’s a good idea to make sure your credit score is looking as healthy as possible. Get tips on improving your credit score.
What alternatives are there to a home improvement loan?
There are several alternatives to getting a loan for home improvement, including remortgaging, getting a home equity loan or a home equity line of credit (HELOC), using a credit card or saving up over time.
If you only need to borrow a small amount over a very short time, consider using your interest-free overdraft if you have one. But bear in mind, unless it’s interest free, an overdraft is unlikely to be the cheapest way for you to borrow.
Another option is a 0% interest purchase credit card. Just make sure you pay off the full balance before the interest-free period ends.
Or if you’re a savvy saver and can afford to wait, choosing to put your money in the right savings account could help you get there without borrowing at all.
What should I do if I’m struggling to make my loan repayments?
If you’re struggling to make your repayments on time, speak to your lender. They may be able to extend your loan to reduce your monthly payments or give you a payment holiday to help you catch your breath.
If you’re struggling with debt, you’re not alone. You can get independent and non-judgemental advice on managing your finances and getting out of debt from services and charities including Citizen’s Advice, StepChange and the National Debtline.
What is a renovation mortgage?
If you’re interested in buying a home that needs fixing up, a renovation mortgage could help you borrow what you need to buy the property and finance the necessary renovations.
Some high-street lenders may not offer standard mortgages for properties that are deemed derelict or uninhabitable, perhaps because they have no running water or bathroom. In that case, you’ll need a renovation mortgage.
Lenders who provide renovation mortgages typically base the loan amount on how much the property is expected to be worth after renovation. But you’ll need to make sure the property is worth the money you’ll have to put in to make it a home.
You can’t compare renovation mortgages with Compare the Market.
The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.