How to fund home improvements

What are my options for funding home improvements?

Looking to fix up your home? Whether it‘s a much-needed repair, adding extra space or making your home more energy efficient, there are many ways to fund home improvements, including:

• Remortgaging your property

• Increasing your existing mortgage

• Taking out a loan secured against your home loan

• Applying for an unsecured loan

• Paying with a 0% or low interest credit card

• Using your savings

• Releasing equity in your home.

So how do you decide what’s best for you? We look at the options to help you make an informed decision.

Remortgaging to pay for home improvements

A remortgage is where you transfer your mortgage from one mortgage lender to another.

If you’re coming to the end of a fixed-rate mortgage, this is something you’ll likely want to do anyway. Otherwise, you risk being moved on to the lender’s standard variable rate, which can be more expensive. So while you’re remortgaging, you could consider increasing your mortgage and using the extra money to cover your renovation costs.

Here’s how it could work:

1. There’s £150,000 left to pay on your current mortgage

2. You’d like to borrow an extra £20,000 for home improvements

3. You look for a mortgage lender willing to lend you £170,000

4. If approved, that higher amount pays off your existing mortgage and releases cash for your renovation budget.

But whether remortgaging for a higher amount is an option for you depends on:

• How much equity you have in your home

• Your financial circumstances

• The lender’s affordability checklist

What’s more, when it comes to remortgaging for funding home improvements, keep in mind you:

• Will be raising the amount of borrowing secured against your home

• Will be paying interest on the extra sum you borrow for the remaining mortgage mortgage term

• Could see your monthly payments go up, or your mortgage run for longer.

So think carefully about whether you can afford the repayments – not just now but in the future.

Is it cheaper to remortgage to fund home improvements?

Remortgaging to fund home improvements might offer a lower interest rate than other borrowing options such as an unsecured personal loan.

But the remortgage rate you’re offered depends on key factors such as:

• Your loan-to-value ratio

• Your credit score

• The length of your new mortgage term.

One upside to remortgaging is that you’ll have your mortgage lifetime to pay back the renovation costs, whereas you can typically only borrow for one to seven years on a personal loan.

However, the downside is that borrowing over such a long time could mean you end up paying more in interest overall.

Find out what remortgaging deals are available for you.

Bear in mind...

If you fail to make your mortgage repayments, you risk losing your home.

When is remortgaging to renovate a bad idea?

Remortgaging to fund home renovations isn’t always the cheapest or best option. Here’s when you should think twice about remortgaging:

You’re locked into a fixed-rate deal

If you’re mid-way through a fixed-rate deal, remortgaging could be costly. This is because most lenders deduct early repayment charges – typically 1-5% of the outstanding mortgage balance.

You have a high loan to value mortgage

If you’re only a few years into a 90% or 95% mortgage, you won’t have built up much equity yet. That means lenders might not be keen to let you borrow more. And if they do agree, you could end up on a more expensive rate.

You’re making renovations just to increase your home’s value

If your main aim is to boost your property price, try to make sure any home improvements have a tangible impact on your home’s market value. Taking on more debt in the hope that a renovation will ramp up what it’s worth is a big gamble.

Your circumstances have changed

When you apply to remortgage, lenders will check your credit score and affordability. So, if you’ve just lost your job or recently become self-employed, you may want to wait until you feel your finances are on a firmer footing.

And if your credit score’s taken a bit of a knock lately, it may be worth boosting it first before you apply.

Increase your existing mortgage to fund renovations

Taking a different tack, you could ask your current lender if they would lend you more money. This is sometimes called getting a further advance on your mortgage.

This could work for you if:

• Your existing mortgage deal has low interest rates - and you’re happy to stick with your current provider

• Switching deals with a remortgage would mean getting stung by early repayment charges that cancel out its benefits.

As a heads up:

• Just as with remortgaging, any extra lending would be secured against your home

• The interest rate on the extra borrowing could be different from your current mortgage rate.

Take out a second mortgage to fund home improvements

Another route to consider is to keep your existing mortgage, but also apply for a second one with a different lender. This is known as a second charge mortgage, taken out against the equity in your home.

Here’s how it works:

• You’d still pay your original mortgage

• On top of that, you’d take out a second loan – both would be secured against your home

• You’d be making two sets of repayments at the same time, often for several years

Be cautious about taking on a second charge mortgage:

• You’d be increasing the total amount borrowed against your home

• The second mortgage might come with a higher rate than your first

• How much you can borrow usually depends on the equity you’ve built up (the value of your home minus the mortgage you owe).

Your home may be repossessed if you do not keep up repayments on your mortgage.

Take out a loan to fund home improvements

If you won't be able to make it work with your mortgage, you could try approaching a bank for a home improvement loan instead.

There are two main types of home improvement loan to look at:

Unsecured loans

If you’re looking to borrow money without tying it to your home, an unsecured personal loan might suit your needs:

• You could fund smaller home improvement projects

• Some lenders will let you borrow up to £25,000 while others may lend up to £50,000

• If you pick a fixed-rate loan, you’ll know exactly what your monthly repayments will be, which can make budgeting easier.

However, do keep in mind:

• Repayment terms usually range from 5 to 7 years

• Monthly repayments can be higher than with a mortgage, because the loan term is shorter and interest rates can be higher too

• The lowest interest rates are typically reserved for those with the best credit rating.

Remember, lenders will take a good look at your credit history to decide whether to approve you.

Secured homeowner loans

Secured homeowner loans, sometimes called home equity loans, let you borrow against the value of your home.

Here’s the lowdown:

• With the loan secured against your property, you can usually borrow more and often at lower interest rates than unsecured loans

• Repayment terms tend to be longer too, in some cases as long as a regular mortgage term.

How much you can borrow depends on:

• Your credit history and overall financial situation

• How affordable the repayments are for you

• The amount of equity you’ve built up in your home

In some cases, you might be able to borrow up to £500,000 – a major sum for major renovation projects. But with some lenders, the maximum is more likely to be around £100,000.

You can search for homeowner loans up to £500,000 with Compare the Market. If you fail to make repayments, your house could be repossessed.

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

Using credit cards to fund renovations

If the cost of your home improvements isn’t too high, you could think about paying with a credit card. This is especially the case if you can bag a card with a low interest rate or even one that has a 0% introductory rate.

Paying with a credit card could also give you a level of protection if you run into issues with contractors, as you may be protected by Section 75 of the Consumer Credit Act.

Before you take on any credit card debt, keep in mind:

• Section 75 protection is not a guaranteed safety net as it can depend on the terms of your contract, and your card provider's policies

• You’ll need to make at least the minimum payment each month. Miss this and it could affect your credit score or even cancel out your 0% offer

• If you go for a 0% card, make sure you can clear the balance before the interest-free period ends. Otherwise, you could get hit with a much higher rate.

Read about the charges you need to consider before getting a credit card.

Saving up to pay for home improvements

One big plus of saving up to tackle your renovations? No debt.

Depending on the improvements you’re planning, it could even be considered as an investment:

• You might boost your home’s value, or

• Energy-efficiency improvements could cut your energy bills in the long run.

If you can afford to go down the savings route, remember:

• You’ll need to be disciplined and resist the temptation to spend your savings on other things

• With interest rates relatively high, now could be a good time to save.

It’s worth comparing savings accounts to see if you could find a competitive rate to grow your money.

Should I release equity for home improvements?

One way for older homeowners (aged 55+) to fund home renovations is through equity release.

• This lets you borrow a portion of the equity you’ve built up in your home as a tax-free lump sum

• You don’t have to repay the lender until the last homeowner on the deeds dies or goes into care

• Until it’s time to repay, you get to stay in your home.

• But there are some downsides to equity release:

• It could affect the amount you can leave as an inheritance for your children

• It can also affect your entitlement to means-tested benefits and help from your local authority.

What should I consider when funding my home improvements?

If you’re planning a makeover for your property, make sure you carefully consider the following :

• You could lose your house altogether if you borrow money and don’t pay it back. This applies whether remortgaging, getting a second mortgage or taking on any type of secured or unsecured loan

• If you’re borrowing more, are you sure you can afford the monthly repayments? It’s important to budget to make sure you can afford to pay back what you borrow

• If you’re trying to save, is the amount you need an achievable goal?

• Are the home improvements absolutely necessary? If you can’t afford them, you should probably rethink your plans.

Compare your options

Whatever option you choose, it’s always a good idea to compare deals. Use Compare the Market to find the mortgage, loan or credit card that best suits you.