Funding home improvements: remortgage or loan?

Once you’re on the property ladder, you’ll probably want to make some home improvements – whether that’s an extension or simply redecorating to put your own stamp on the place.

If you need money to fund your renovations, here are some of your options.

Once you’re on the property ladder, you’ll probably want to make some home improvements – whether that’s an extension or simply redecorating to put your own stamp on the place.

If you need money to fund your renovations, here are some of your options.

Mark Gordon
From the Mortgages team
7
minute read
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Posted 5 AUGUST 2021

What are my options for funding a home improvement?

There’s a number of ways to fund home improvements – you just have to decide which one is right for you.

Remortgaging

You could consider remortgaging your home. A remortgage is the process of transferring your mortgage from one lender to another.  

For example, if you have £150,000 outstanding on your existing mortgage and you’d like £20,000 for home improvements, you may be able to find a mortgage lender willing to lend you £170,000. You would then be able to use the £170,000 to pay off your existing mortgage and fund the work on your home. 

Remember that, by remortgaging, you’ll be increasing the amount of borrowing secured against your home and paying interest on the extra you borrow over the whole mortgage term. Also, your mortgage payments may increase over the term of your mortgage (which could be 25 years or more). Make sure that you’re happy with paying that amount when you’re older.  

You may also have to pay an early repayment charge to leave your current lender and fees for remortgaging to a new one, so include these in your calculations when deciding whether or not it’s a feasible option.

Increase your existing mortgage

Taking a different tack, you could approach your current mortgage lender and ask if they’re prepared to lend you more money. This might be a good idea if your existing mortgage deal has low interest rates - and you’re happy to stick with your current provider. It could also be an option if any early repayment charges for leaving your current mortgage agreement outweigh the benefits of remortgaging.

Remember, just like with remortgaging, any loan would be secured against your home and you’ll need to pay back the money. And bear in mind the interest rate you’re charged on the additional borrowing could be different to your current mortgage rate.

Take out a second mortgage (second charge mortgage)

Another option is to keep your existing mortgage and find another lender prepared to give you a second, separate mortgage – a secured loan taken out in addition to your existing mortgage, against the equity in your property. 

You’d then need to make repayments on both mortgages simultaneously, potentially over several years. 

Be aware that getting a second charge mortgage involves increasing the amount of borrowing secured against your home and may also be offered at a much higher rate than your existing mortgage. 

The amount you can typically borrow with a second mortgage depends on the equity you have in your property – 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.

An unsecured loan

If the last thing you want to do is borrow more money against the value of your home or other assets, you could try approaching a bank or other lender for a home improvement loan. This would typically come in the form of an unsecured personal loan, based on your creditworthiness rather than any type of collateral. 

These types of loans typically have repayment terms of up to five years. They also have fixed interest rates, which can be helpful when planning your finances. Just make sure you can keep up with the monthly repayments – these are usually higher than monthly mortgage repayments in the short term.

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.

Credit cards

If the cost of your home improvements isn’t too high, you could consider paying with a credit card. This might be an attractive option if you can get 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, you’ll need to be confident that you can afford to make at least the minimum payment each month. Read about the charges you need to consider before getting a credit card.

Savings

Saving up to pay for home improvements has one obvious advantage – you won’t be taking on extra debt. But you’ll need to be disciplined and resist the temptation to spend your savings on other things, like holidays.

And remember that interest rates on savings accounts are very low at the moment, while some higher-rate savings accounts may restrict access to your money.

What should I consider when funding my home improvements? 

If you decide to borrow money for improving your home, it’s worth remembering that if you don’t pay it back, you could lose your house altogether. Always bear this in mind when considering remortgaging, a second mortgage or any type of secured loan. 

If you’re considering remortgaging or taking out a new loan, are you sure you can afford the monthly repayments? And if you’re trying to save, is the amount you need an achievable goal? 

Are the home improvements really 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 shop around. Use Compare the Market to find the mortgage,  savings account,  loan or  credit card that best suits you.

Frequently asked questions

Should I release equity for home improvements?

One way for older homeowners to fund home renovations is through equity release. This allows you to release a portion of your home’s value as a tax-free lump sum. The bonus of equity release is that you won’t have any monthly repayments to think about – you don’t have to repay the lender until the last homeowner on the deeds dies or goes into care. So you’ll also get to stay in your home.  

One of the downsides, however, is that your children won’t receive the inheritance they might have hoped for.

How can I keep my renovation costs down?

Whichever way you decide to fund your home improvements, it’s vital to keep your costs down. There’s a few ways you can do this: 

  • Set a budget
    Know how much you’re willing to spend from the outset. It’s vital to set a budget at the beginning and to factor in all costs. For instance, if you’re planning an extension it’s likely you’ll have to move out for a while, so you may need to include rent on a temporary residence.
  • Compare contractors
    If you’re employing tradespeople like builders or plumbers, make sure you get detailed quotes from at least three as their fees can vary enormously. Check that the quotes cover every aspect of the work (including materials), so you don’t end up being billed for unexpected extras.
  • Work out the cheapest way to borrow
    Go through all the borrowing methods we’ve mentioned and research how much each one will cost you in total. You may well find that the one that seems cheapest will end up costing you the most. That’s why it’s so important you sit down and do the maths.

What else should I think about when renovating my home?

If you’re planning to push ahead with home improvements, it’s important to consider whether they’ll add value to your property – and, if so, how much? Even though you may not have considered it, it’s worth weighing up whether moving house or home improvements is the most economical option for you. Depending on where you live, extensions and loft conversions could add a huge amount to your property value. But some improvements – like losing a bedroom to create a bigger bathroom – might actually devalue your home. You may want to speak to an estate agent before you crack on with any work.  

Remember, too, that if you’re making structural alterations to your home you may need to get planning permission. 

And make sure your home insurance covers you while you’re making home improvements. You should always tell your insurance provider before pressing ahead with any renovations because, depending on the work being done, there may be restrictions placed on your cover.  

Naturally, if the rebuild value of your property increases due to the improvements or you buy more furniture to fill your new space, then your home insurance premium may well increase too, depending on the policy you have. So it’s vital to keep your insurance provider firmly in the loop. 

Finally, if you do go ahead with your home improvement plans, it’s also worth considering accidental damage insurance which could protect you financially if something you do damages your building or its contents.

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