How to fund home improvements

Whether it’s fitting in a study so you can work from home or adding a room onto your detached house, home improvements cost money.

If you’re looking for a way to finance these renovations, there will likely be several options available. But which one is best for you?

Below we’ve listed some of the different ways you can finance your home renovation project.

Depending on how much you expect to spend on your home improvements, you could opt for either a personal or secured loan.

Matt Tristram, Co-Founder and Director at Loans Warehouse, our preferred loans broker, said that if your home improvements cost less than £10,000 then it’s often better to opt for a personal loan over a secured loan.

“The fees involved in a secured loan for an amount under £10,000 often mean the rate isn’t as attractive,” he elaborated.

As opposed to a secured loan, a personal loan doesn’t require a form of collateral if you can’t repay the loan.

Still, you’ll need to make a fixed number of monthly repayments to pay back the capital borrowed plus the interest. Since the repayments are fixed, you’ll need to consider if you can keep up with the repayment plan until it finishes.

Otherwise, for a lower potential interest rate, you could opt for a secured loan instead.

The advantage of using a secured loan over a remortgage is that the secured loan will likely be spread over a shorter period. This means, if you can afford it, your borrowing should cost less overall.

Tristram also said that secured loans often come with “a low or no early repayment charge”. So, if you suddenly come into a large lump sum, such as a gift or inheritance, then you can use this to pay off your loan.

If you’ve built up substantial equity in your property then you can use this to fund your home renovations.

But before you commit to this form of lending, there are several caveats you’ll need to consider. Firstly, using your mortgage lender to pay for your home improvements is a long-term commitment. As stated, this means it could cost more overall than a loan and, if you want to pay off your debt early, there might be a hefty mortgage exit fee.

In addition, it’s worth remembering that your home might be repossessed if you don’t keep up with your monthly repayments.

If you’re approaching the end of your mortgage term then you could ask for the value of your home improvements to be added to your new mortgage.

Consider this example: Daniel’s initial mortgage term is coming to an end and he still owes £100,000 on his home. He wants to make home improvements which will cost £20,000. So, when remortgaging, he’ll ask to borrow £120,000.

In order for his bank or building society to approve his lending, he’ll need to demonstrate his ability to pay the extra money back. This means he’ll need to pass a mortgage affordability assessment.

In addition, he’ll also need to consider if the extra amount borrowed will push him into a higher loan-to-value bracket. If so, he could face a higher rate on his mortgage.

If you’re keen to leave your existing mortgage as is, or if you’re not due to remortgage yet, then the next option is to take out a second mortgage against your home.

This can be in the form of a further advance from your existing lender or a secured loan against your home from another provider.

Either way you’ll need to keep up with both your initial mortgage repayments and the charge on your new borrowing. Miss repayments on either and your home could be repossessed.

If you don’t expect your home renovations to be too expensive and if your credit score is good,  it could be worth exploring the option of a 0% purchase credit card.

The advantage of this type of credit card is that you won’t be charged interest on any debt for an “introductory period”.

The length of this introductory purchase period depends on your credit score and your provider, so to view the best options currently available make sure to look at our chart.

However, it’s crucial that you completely pay off your debt during this period, or else you’ll face being charged a significant rate which is typically more expensive than other forms of borrowing. 

It’s also worth noting that other activities on this card may incur a charge, such as balance transfers or cash withdrawals.

One of the more cost-effective ways to pay for your home renovations is to dip into your savings pot. This is because if you save enough then you won’t need to pay interest on your borrowing.

Besides negating any credit checks, it may also be an option for those willing to put their home renovation plans on ice. If you start saving for future renovations today then you could be able to put this money into an easy access or regular savings account.

To search for the best savings rates, and what you could earn, use the Moneyfactscompare.co.uk website.

Equity release is never a decision to be taken lightly, but it is an option for older homeowners who may struggle to access other conventional forms of borrowing.

If you’re seriously considering equity release, read our guide. But, in summary, equity release is a loan against your home where you’ll just be required to pay off the interest until you die or move into long-term care. Once this happens, then your home will be sold and some of the proceeds will be used to pay the original capital borrowed.

Under an equity release plan you’ll have the flexibility of choosing when to make your repayments. However, you’ll need to remember that delaying these repayments will compound your interest and make the borrowing more expensive overall.  

To find out if equity release is right for you, speak to our preferred equity release partners, Mortgage Advice Bureau Later Life (MAB LL).

If you choose MAB LL as your equity release partner they will undertake a complete review of your finances. Once completed, the review will explore alternatives to equity release to see if these might better meet your needs.