How to finance your home improvement project

At a glance

• While using savings is likely to be the most cost-effective way to fund home improvements, there are plenty of options if you don’t have the necessary funds to hand.
• Before deciding on the right path for you, you’ll need to consider when you want to carry out your improvements and if you can wait to do so.
• It’s also important to think about whether you can afford to take out credit and what your budget is to be sure you can meet the repayments.

From a new kitchen or energy-efficient upgrades to an extension – making your house a home can be costly. This is why it’s important to carefully consider how to pay for your home improvements.

Making changes to your home can vary wildly in cost, so the scale of the project will likely affect how you choose to pay. But, whether you are trying to up the value of your home or simply update the decor, there are several ways to go about achieving your goals.

Ultimately, how to best finance home improvements comes down to your personal circumstances and your renovation project. Below are some of the ways you could fund your home improvements

Savings

Dipping into your savings can be one of the more cost-effective ways to finance home improvements as you won’t need to worry about paying interest or repaying a debt. However, the feasibility of this depends on how much you have in savings and the cost of your project. Ideally you don’t want to wipe out your savings to fund your home improvements, as you will want a reserve to cover any emergencies that could otherwise leave you out of pocket.

If you don’t have sufficient money already in savings and you can wait before starting your home improvement project, you could start saving for the costs.

Easy access accounts can be a useful place to put money aside for your improvements, as these typically allow you to add to and withdraw from your pot as and when you need. Therefore, you can save up your desired amount, and it will be there to spend on your project when you’re ready but it’s best to check the account’s terms and conditions as some may apply a lower rate of interest if you make more than a set number of withdrawals per year.

Alternatively, regular savings accounts often offer some of the highest rates on the market and can help you to set aside a little bit of money for your improvements. However, as they limit the amount you can deposit each month, it could be difficult to save up the amount you want, depending on the expected cost of your renovations.

If you can’t wait to start your home improvements, there are other options available.

Credit cards

If you’re planning smaller refurbishments to your home, such as a new boiler, a 0% purchase credit card may be worth considering. This will allow you to fund small projects without paying any interest – as long as you pay off the balance before the 0% period ends and stick to the terms of the card, including making the minimum monthly payments.

The interest-free period on a 0% purchase credit card typically ranges from three months to over 20 months – and can save you hundreds of pounds (or sometimes more) than if you were to borrow on a standard credit card over the same length of time. However, credit cards can be expensive if you aren’t able to clear your balance before the interest-free period ends. When you can’t repay, you risk this debt building up and becoming unaffordable.

A 0% purchase credit card can be used for most purchases, provided the retailer accepts credit card payments. It’s worth noting that you may not be able to pay tradespeople via this method as some contractors don’t accept credit card payments.

Positively, any credit card purchases between £100 and £30,000 are covered by Section 75 of the Consumer Credit Act. This means you could get your money back from the card provider if there was a problem with your purchase (and if the company won’t refund you). To compare 0% purchase credit cards, view our dedicated chart.

Personal loan

If you’re looking to borrow larger sums over a longer period to fund your home improvements, a personal loan could be an option. A personal loan is a form of unsecured lending, meaning you don’t need to put up any collateral (such as your house) against the money you have borrowed. You can typically borrow between £1,000 and £25,000 with a personal loan, although some lenders may be able to offer up to £50,000.

It’s important that you only borrow the amount of money needed for your refurbishments or renovations and choose the shortest term that you can afford. While it may be tempting to select a longer term, as your monthly repayments would be lower, you’ll end up paying more interest overall than if you repaid the loan over a shorter period.

For example, if you borrowed £5,000 at an interest rate of 7% and repaid it over five years, your monthly repayments would be £98.50 and the total amount of interest you would pay would be £909.97.

However, if you paid back the loan over three years instead of five, your monthly repayments would increase to £153.89 but the overall interest you pay would drop to £540.20.

Although a personal loan may charge a lower rate of interest than a standard credit card, the exact rate you receive depends on the lender, your credit score and financial situation. The best rates on a personal loan typically require a good credit score, so it may be worth checking your credit history before applying.

Secured loan

Another option for those looking to fund large-scale home improvements is a secured loan. A secured loan allows you to borrow tens of thousands of pounds, or sometimes up to one million or more, depending on the value of your property and the equity you own in it.

However, taking out a secured loan isn’t a decision to be made lightly. It carries an extra element of risk as secured lending requires you to put up an item of value – such as your house – as collateral.

This means that, if you can’t pay back the money borrowed, the lender is entitled to repossess your property. For this reason, it’s also a good idea to factor unexpected costs into your home improvements budget, to allow yourself some breathing space if something goes wrong with your renovations, or if there are changes to your personal and financial situation. If you suddenly found yourself with a bill for a car fault or out of work, for example, could you still meet your monthly repayments? If the answer is no, consider whether the risk is too high.

You might be wondering whether secured or unsecured lending is more cost effective for funding your home improvements. Secured loans tend to have a lower interest rate because they’re backed by an asset, such as your home, which lessens the risk for the lender. Despite this they aren’t necessarily the cheaper option, as secured loans typically have longer repayment terms, meaning you could end up paying more interest overall.

Remortgage

Remortgaging is another way you could fund your home improvements. This is where you transfer your existing mortgage to a new deal (but you don’t move house). However, to fund your renovations, you’d need to remortgage for a larger amount than your outstanding balance.

For example, if you had an existing mortgage of £150,000 and the work you’re planning to have done on the house costs £15,000, you’d need to apply for a £165,000 mortgage as this would give you the money for your renovations.

Remortgaging could allow you to access lower interest rates and has the benefit of spreading the borrowing costs over a longer repayment term for those who need it (compared to a standard personal loan).

However, keep in mind that you could face an early repayment charge (ERC) from your existing lender if you exit your current deal before the term ends. It could be worth waiting until the end of the fixed term to remortgage if possible, to avoid any ERCs.

There may be other fees to consider when remortgaging, such as any potential product fees or valuation fees applicable to the new deal, broker fees if switching to a new lender, possible deeds fees or admin fees.

Remember that remortgaging will increase the size of the loan against your home, which means you will pay more interest overall.

Lenders will run credit and affordability checks when you apply to remortgage to see how likely you are to pay back the money borrowed. Bear in mind that, if you have a high loan-to-value (LTV) mortgage and own less equity in your home, some lenders may not allow you to borrow more.

For advice on remortgaging, speak to a mortgage broker, who can assist you with your next steps. Brokers will take care of the paperwork for you and can help you access exclusive products and rates not available on the market.

Equity release

An alternative option for homeowners aged 55 and over who may not meet the affordability criteria to remortgage or for a secured loan is equity release. This is when you unlock money tied up in the value of your home. You could consider this method of funding your home improvement project if you need to borrow a larger amount or are wanting to add value to your home.

There are different types of equity release available, some of which require you to make regular interest payments and others where the interest builds up over the term. Either way, the debt is repaid by selling the house after you pass away or move into long-term care. Crucially, this could impact any inheritance you plan to leave your loved ones as this could substantially reduce the money they’d receive from the sale of the house, or at worst, leave none depending on the amount of equity released.

 As with any form of secured lending, equity release comes with its risks and can be a costly route for funding your home improvements. Before deciding to release equity in your home, it’s vital to seek advice so that you fully understand the risks and implications involved.

To learn more about equity release, see our guide. Or, for more information on whether equity release is the right path to funding your home improvements, speak to our preferred equity release partners, Mortgage Advice Bureau Later Life.

What to consider before making home improvements

Before making any home improvements, there are several things to consider first. These include:

How much are your renovations going to cost?

Knowing how much you’ll need to set aside for your home improvement project will help you figure out your budget and how to fund it. Research how much these projects typically cost and get quotes from multiple tradespeople to ensure you’re getting the best value for money.

It’s also important to make room in your budget for any unforeseen costs - especially if you’re planning a larger scale renovation which could quickly escalate in price.

When do you want to do your home improvements and can you wait?

If you can’t wait to carry out your renovations and are unable to dip into your savings to fund them, this narrows down your options. However, if you can afford to wait, you have time to save up to cover – or at least partially cover – your home improvements.

If you’re saving for your home improvements, is the amount achievable?

Setting a goal to stay disciplined can help when saving up money to cover, or partially cover, any home improvement project. Divide the total amount your home improvements are likely to cost by the number of months you’re happy to wait to get an idea of how much money you’ll need to set aside each month.

If you don’t think this amount is achievable, reconsider how long you can afford to wait to start your renovations, or whether another funding method could be better suited.

Could you afford to take out credit and if so, how much could you comfortably afford to repay?

Knowing how much you can afford to borrow, and how much you can comfortably repay each month, can help you work out which type of credit is best for you.

It’s also worth considering if you would still be able to afford the repayments if you suddenly found yourself out of work, for example. You could lose your house if you borrow money and can’t pay it back. Regardless of the type of credit used, missing payments could have serious consequences.

Will your renovations add value to your property?

Adding value to your home is a popular reason why many people undertake home improvement projects. If you want to know how much value your project will add to your property, it could be a good idea to speak to an estate agent or chartered surveyor.

Is moving cheaper?

If your house needs to undergo a lot of work, like an extension, you might want to weigh up whether the renovations or moving to a bigger property would be the more cost-effective choice.

Do you need to get planning permission?

Certain types of home renovations may require you to get planning permission from your Local Planning Authority. If you’re planning on building an extension, for example, you might need to apply for planning permission.

Do you need insurance?

Home insurance or accidental damage cover add-ons could cover some minor mishaps arising from home improvement projects; however, any larger-scale renovations may require specialist cover.