How to fund home improvements
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.
What are my options for funding a home improvement?
Whether you’re looking to make necessary repairs, increase the space in your home, or improve your home’s energy efficiency, there are a number of ways to fund home improvements, including:
- Remortgaging your home
- Increasing your existing mortgage
- Taking out a loan secured against your home
- Applying for an unsecured loan
- Pay for improvements 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 options to help you make an informed decision.
Remortgaging to pay for home improvements
A remortgage is the process of transferring your mortgage from one mortgage lender to another. If you’re on a fixed-rate mortgage, you’ll likely want to do this anyway at the end of the fixed-rate period to avoid being put on to the lender’s standard variable rate. At this point, depending on how much equity you have in your home, the value of your property and your financial circumstances, you could apply to increase your mortgage and use the additional amount to fund your renovations.
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. Your mortgage payments could also 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 mortgage, so include these in your calculations when deciding whether or not it’s a feasible option.
Is it cheaper to remortgage to fund home improvements?
Depending on the loan to value ratio you’ll be borrowing at, you may well get a lower interest rate by remortgaging for an additional sum than you would if you took out an unsecured personal loan. The additional upside to remortgaging is that you’ll have the lifetime of the mortgage to pay back the renovation costs, rather than the one to seven years typical for personal loans. The downside is that you may end up paying more in interest overall. And if you fail to make your mortgage repayments, you risk losing your home.
When is remortgaging to renovate a bad idea?
Remortgaging your home to fund renovations is not always the cheapest or best option. Here’s when you should think twice about remortgaging:
- You’re locked into a fixed rate deal: it’s best to wait till the end of the fixed rate term of your mortgage to switch as early repayment charges can be prohibitively high – typically 1-5% of the outstanding mortgage balance. In this case, it could be worth speaking to your existing lender to see if they can increase your mortgage amount.
- 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 in your home and lenders may be reluctant to lend you more when you remortgage. And if they do agree, you’ll likely be pushed onto expensive rates.
- You’re making renovations to increase your home’s value: if this is your goal it’s important to make sure the home improvements will actually increase the value of your home as expected. Taking on more debt in the hope that a renovation will add value is a big gamble.
Increase your existing mortgage to fund renovations
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 from your current mortgage rate.
Take out a second mortgage to fund home improvements
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 could 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.
Take out a loan to fund home improvements
If it’s not a good time to meddle with your mortgage, you could try approaching a bank or other lender for a home improvement loan instead.
There are two main types of home improvement loan to consider:
Unsecured loans
Unsecured personal loans allow you to borrow money without putting up any collateral, such as your home, as security. Instead, lenders will look at your creditworthiness to decide whether you’re likely to repay the loan, with the best interest rates reserved for the borrowers with the best credit ratings. You may find that some banks will only lend to current account holders, while other are happy to lend to anyone.
With an unsecured loan you could fund smaller home improvement projects – some lenders offer a maximum loan of £25,000 but you can find others that will lend up to £50,000. And if you choose a fixed-rate loan you’ll know exactly how much you’ll need to pay back each month, making it easier to plan your finances. Unsecured loans typically have repayment terms of up to five to seven years. Just make sure you can keep up with the monthly repayments – these are usually higher than monthly mortgage repayments in the short term.
Secured homeowner loans
Secured homeowner loans allow you to borrow larger sums of money, typically at a lower interest rate than unsecured loans, by using your home as security. Secured loans, also called home equity loans, typically have longer repayment terms – maybe as long as a mortgage term.
Depending on your financial situation, affordability, credit history and the equity you have in your property, you may be able to borrow up to £500,000 with a secured homeowner loan to fund a major renovation project. But limits with some lenders will typically be much nearer £100,000. You can search for homeowner loans up to £500,000 with Comparethemarket. But it’s important to consider that if you fail to make repayments, your house could be repossessed.
Comparethemarket 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 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, but this will depend on things like the terms and conditions of your contract and the rules of the card issuer as it's not a guarantee.
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. If you do choose to fund your home improvements using a 0% interest credit card, make sure you can pay off the balance before the end of the 0% interest-free period to avoid ending up with the lender’s higher rate. Read about the charges you need to consider before getting a credit card.
Saving up to pay for home improvements
Saving up to pay for home improvements has one obvious advantage – you won’t be taking on extra debt. Depending on the improvements you’re planning you could consider it an investment; you may be adding value to your property or, in the case of energy efficient improvements, saving yourself money on future energy bills. But if you want to go the savings route, you’ll need to be disciplined and resist the temptation to spend your savings on other things.
And remember that interest rates on savings accounts are still low at the moment (well below inflation), while some higher-rate savings accounts may restrict access to your money, or charge you a penalty to withdraw it early.
Should I release equity for home improvements?
One way for older homeowners (aged 55+) 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. 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 it could affect the amount you can leave as an inheritance for your children. Equity Release 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 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 or unsecured loan.
If you’re considering remortgaging or taking out a new loan, are you sure you can afford the monthly repayments? Whenever you take on any new debt, whether that’s through a loan, an overdraft or on a credit card, it’s important to budget to make sure you can afford to pay back what you borrow. 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 Comparethemarket to find the mortgage, loan or credit card that best suits you.
Frequently asked questions
How can I keep my renovation costs down?
Here are some tips for keeping your costs down when planning home improvements:
Set a budget
Know how much you’re willing to spend from the outset, but don't forget to allow some contingency in case there are some surprises in the project.
Compare contractors
If you’re employing tradespeople, 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 to see which is the right fit for your financial situation.
What else should I think about when renovating my home?
As well as considering if you can live with the mess and the disruption if you're staying in the house while the work is done, here are a few things to consider before you crack on with renovations:
- Will the renovation add value? Check with an estate agent to get an idea.
- Moving may be cheaper. Read our guide to the pros and cons of moving house or making home improvements.
- Do you need planning permission? If you’re making any change to your home’s structure, speak to your local council.
- Does home insurance cover you while you’re renovating your home? Tell your insurance provider of any planned improvements, and ask about any restrictions on your cover.
- Do you have accidental damage cover? It could protect you financially for any damage to your building or its contents.
- Your home insurance premiums may go up, if the rebuild value of your home goes up.
Can I get a grant to help with energy efficient home improvements?
Unfortunately, applications for the government’s Green Homes Grant have now closed. This scheme allowed eligible homeowners apply for a voucher to cover two thirds of the cost of energy efficient home improvements, up to a maximum contribution of £5,000.
Check to see if you would be eligible for any other grants or help on GOV.UK.
Although not a grant, some banks have schemes in place to allow customers to borrow extra money on their mortgages at lower rates if they’re using the money to make energy efficiency improvements to their home. It’s worth speaking to your mortgage lender to see if they have anything similar in place.
The Editorial Team - Compare the Market
Experts in personal finance, insurance and utilities
Compare the Market’s Editorial Team is made up of industry experts with decades of experience in personal finance, insurance and utilities. Each of our authors has an area of expertise, where they can share their extensive experience to help you get a better deal, by finding the right product and saving money.