15 min Read
04 Apr 2018

Written by Marc

Marc Shoffman is a leading finance journalist who specialises in personal finance, property and small business.

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The best way to fund home improvements

The best way to fund home improvementsFrom a lack of property supply to high house prices and Stamp Duty costs, it is no surprise that many homeowners are choosing to improve their existing property rather than move. Adding a new bathroom, kitchen or extension to your current home can make a property feel like new, no matter how long you have lived there. Renovating will work out cheaper than buying a new property but you still need to find the funds to pay for it. Record low remortgage and personal loan rates mean there are plenty of options when it comes to funding your home improvements.

Funding home improvements

The price of home improvements will depend on what you want to do, the size of the job, the type of materials used and the finish. According to website  Victoria Plum the average cost of a new bathroom is around £4,500, while a medium-sized new kitchen could cost £3,000 or up to £10,000 for bigger rooms.

Find a tradesman site Home Advice Guide says - When it comes to larger jobs such as an extension, builders tend to suggest a budget of around £1,000 to £1,500 per square metre. This means a 3 x 5 metre extension could end up costing up to £22.500.

This may sound like a lot of money, but not only do you get a shiny new room or extra space, estate agents also say a new kitchen or bedroom can add value to your property. According to estate agents polled in the Renovations and Extensions Report 2018 by insurer Hiscox, extending a property with the addition of a new bedroom can boost a typical home’s value by 11.2%, while a new kitchen-diner can boost a home’s value to a similar extent (10.8%).

There are a number of ways of funding home improvements or to finance a house extension. The first thing you need to do is set a budget. You need to know the cost of the works, including the labour and materials as well as any other aspects such as obtaining planning permission. Bear in mind that many people underestimate the true costs of home improvements. Hiscox found 40% of renovators exceeded their original budget by an average of £3,200.

It is always worth using existing savings before taking on debt. If you are willing to wait for the works you could try to set aside an amount each month based on your budget. If you have already built up a pot of savings, high inflation and low-interest rates means your extra cash isn’t much use in the bank, so you could put it towards improving your home instead.

Remember, this may not be the only thing you are saving for so don't exhaust your savings pot as it is important to keep money aside for emergencies. The general rule being that you should have three months’ worth of salary put aside for emergencies.

Another option for funding home improvements is to take out a personal loan, use a credit card or even remortgage to get the cash to fund your project. These options involve taking on extra debt so you need to ensure you can afford the repayments.

If you are going to borrow to fund home improvements then it is best to include the cost of any repayments in your budget as well. The Money Advice Service has a useful loan calculator that will tell you what the monthly repayments on a loan will be based on the amount borrowed and the interest charged.

Getting a home improvement loan

A home improvement loan is just another form of personal loan. You can usually borrow up to £50,000 with a personal loan from a bank, building society or peer-to-peer lender. A price war has been going on in the personal loans market over the past few years due to low-interest rates. Some providers have been known to offer personal loans for an annual percentage rate (APR) of as low as 3% or under. There are still some deals at around these rates, but it depends on how much you borrow.

The best home improvement loan rates tend to be for amounts between £5,000 and £25,000. That is where the cheapest rates are usually on offer, but anything below or above that can be more pricey so it may be worth looking for alternatives. Unlike a mortgage, most personal loans are unsecured so your home won’t be at risk but your credit rating will be affected if you do not keep up with repayments and interest could be added if you miss payments.

Providers can be a bit sneaky with their personal loan pricing as they are advertised as 'representative APRs'. Only 51% of successful applicants need to get those rates for them to be called 'representative'  so others can be charged more. The rate you get will depend on your credit rating and income and how much the lender thinks you can afford. Searching for credit can also hit your credit rating and harm your chances of getting finance so it is always worth using loan calculators or comparison websites that perform a soft search to get an idea of the type of loan you will be accepted for before applying.

You can also get secured home improvement loans that use your property as security. These usually let you borrow more than an unsecured loan depending on the equity in your home, but your property is at risk if you fail to keep up with repayments.

Both a secured and unsecured personal loan can be more flexible than a remortgage as you can choose to repay over one, three or five years and some providers may even allow payment holidays or will let you repay earlier.

The application process for a personal loan can be faster than a remortgage as everything is done online and you can receive a decision within minutes and receive your money in just a few days. In comparison, a lender would have to revalue your home and take you through a gruelling affordability and application process for a remortgage, a process that can take a couple of months.

Using personal loans or credit cards to fund home improvements

If you are only looking to borrow a small amount, it may be worth considering using a personal loan or a credit card. The amount you can borrow will depend on a number of factors including occupation, income, existing credit and your personal credit rating

There are a number of competitive small personal loan rates available and several 0% purchase cards that offer interest-free repayments for a set number of months, which will allow you to spread the cost of repayments over a long period. For example, Sainsbury’s Bank currently has a 0% purchase card with an interest-free period lasting for 31 months. Always check the terms & conditions on any credit card, for example the rate on the Sainsbury’s Bank card increases to 18.9% at the end of the introductory period or if you fail to even make the minimum repayment. It is also worth looking out for credit cards such as American Express and TSB who will also pay cashback on spending.

Using a credit card also gives you an added layer of protection under the Consumer Credit Act, if any of your purchases are faulty you can claim the money back through the credit card provider up to a maximum of £30,000.

Remortgage to pay for home improvements

If your home renovations project looks like it is going to cost more than £50,000 or even into double figures, it may be worth borrowing extra money on a mortgage. Mortgage rates are pretty cheap at the moment and if you have enough equity in your home it may be worth remortgaging onto a bigger loan to release extra cash that you can then put towards your home improvements.

Remortgaging will involve taking on a bigger loan so you will need to ensure you can meet your repayments and find a lender that will accept your application. If you are in the middle of your current deal there may be expensive early repayment charges to move to another rate so you may want to consider a 'further advance' against the value of your home. A further advance is treated as additional borrowing on a mortgage from your lender and usually has a minimum loan of around £10,000. A further advance is charged at a separate rate but will be considered as part of your total borrowing so your current lender will want to be sure that you can afford both.

If you are buying a home with a mortgage and planning to make changes once you move in you could ask your lender to provide extra funds for these additional costs. There are some smaller building societies that will provide renovation mortgages which release funds in stages. Alternatively you may need to buy the property, get the work done, then have it revalued to obtain a further advance.

Applying for a mortgage, a remortgage or a further advance will be treated as a new mortgage application so in all these cases it is important to speak to a mortgage adviser. If you don’t already have a mortgage adviser that you trust then you can find one using Vouchedfor which has over 50,000 customer reviews for over 2,000 mortgage advisers. It's easy to locate a suitable and trusted mortgage adviser near you. The adviser can then help set a budget and take account of how much you need to borrow and find the best lender for your needs and advise on how to prepare your finances to boost your chances of a successful application.

For information on remortgaging read this article - How to remortgage and get the best rate

Using equity release to fund home improvements

If you are over 55 equity release could be a possibility. Equity release is a loan that allows people over age 55 to release cash from the value of their home. You could use equity release to pay off debts, go on a world cruise or for funding your home improvements. An equity release provider can arrange a lifetime mortgage that provides a lump sum linked to the equity in your property, or drawdown schemes that let you access cash when needed. Unlike a standard mortgage, an equity release lifetime mortgage has no monthly repayments, the interest and the loan has to be repaid either once you go into care or pass away. This typically means selling your property which can affect any inheritance you want to leave. Some equity release plans will let you preserve some of the value of the property for inheritance. There are also home reversion schemes where you can sell a portion of your home to release cash. You can remain in the property but it is sold on death and any proceeds are distributed based on how much each party owned.

It is important to seek financial advice as some equity release schemes may charge high fees if you want to repay early and arrangement and product fees will vary.

For more information on equity release read this article - How to release equity in your home - Equity release mortgages explained

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