Funding home improvements: remortgage or loan?
Funding home improvements: remortgage or loan?
After getting on the property ladder, you might decide you want to make home improvements – whether it’s an extension or redecorating to put your own stamp on the place. We look at the potential options if you need money to fund these improvements…
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.
You’ll need to be aware that by remortgaging you’ll be increasing the amount of borrowing secured against your home. Plus, your mortgage payments may increase over the full term of your mortgage (which could be 25 years or more). Make sure that you’re happy paying that amount when you’re older.
You may also have to pay fees associated with remortgaging so make sure you include all of these in your calculations when you consider whether it’s a feasible option.
Increase your existing mortgage
You could try approaching your existing mortgage lender and asking if they’re prepared to lend you more money. You might do this if your existing mortgage deal has low interest rates (and you’d like to stick with your current provider). You may also want to do this if you have significant penalties for terminating your existing mortgage, which outweighs the benefit of remortgaging.
However, as with remortgaging, any such advance would be secured against your home, and you would still need to pay back the extra money. Also, be aware that the interest rate you’re charged on the additional borrowing could be different to your existing mortgage rate.
A second mortgage (secured charge loan)
Another option is to keep your existing mortgage intact and to find another lender prepared to give you a second mortgage. You’d then need to make repayments on both mortgages simultaneously, potentially over several years.
Be aware that this option also involves increasing the amount of borrowing that’s secured against your home, and a second charge mortgage may also be offered at a rate that’s much higher than your existing mortgage.
An unsecured loan
If you don’t want to secure additional borrowing against your home, you could try approaching a bank or other lender for an unsecured personal loan (a loan that is issued and supported only by the borrower's creditworthiness, rather than by any type of collateral).
These types of loans typically have repayment terms of up to five years and usually have fixed interest rates, which can be helpful when you’re planning your finances. Just make sure you can keep up with the monthly repayments, which are usually higher than monthy mortgage repayments in the short term.
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 one that has a 0% introductory rate.
Paying via credit card also gives you some protection should there be issues with the contractor that carries out your home improvements, as you’ll be protected by Section 75 of the Consumer Credit Act.
Before taking on any credit card debt, as with any other form of borrowing, you need to be totally clear what the required repayments will be. You’ll also need to be confident that you can afford to make the minimum repayments (at least) on time, each month. There is also often an initial charge for borrowing this way, e.g. 3% of the amount borrowed.
Saving up to fund home improvements has one obvious advantage, and that’s you won’t be taking on additional debt. However, you will need to be disciplined enough to resist the temptation to dip into your savings to spend on other things.
Just remember that interest rates on savings accounts are very low at present, and that some higher-rate savings accounts may have restrictions on accessing funds.
What should I consider when looking to fund my home improvements?
It’s worth bearing in mind that if you decide to borrow money for your home you could lose your house – so it’s vital to bear this in mind when considering remortgages, a second mortgage, or a secured loan.
- If you’re considering remortgaging or taking out a new loan, are you confident that you can afford the monthly repayments?
- 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 to fund them, you may have to 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.