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Home Improvement

Home improvements can be expensive.

Even a relatively minor job, such as re-doing a small bathroom or kitchen, can comfortably come to £5,000-£10,000. It’s not surprising that many people use credit to spread the cost of these improvements into manageable monthly repayments.

In fact, if you’re considering a home improvement loan, you’ll likely find that there are many options available to you. In this article, we’ll take a look at the most common ways to pay for home improvements, giving you an insider’s guide to how home improvement loans work and which lending option is likely to suit you best.

If you’re looking for a flexible personal loan of £1,500-12,000, you can take a look at our loan calculator or make an application at www.koyoloans.com . Representative APR 27%.

What is a home improvement loan?

Most home improvement loans are actually very simple, working like a standard personal loan . There are a couple of exceptions such as adding to your mortgage or paying on a credit card, but we’ll look at those separately.

Home improvement loans can be used to borrow anything from a few hundred pounds to tens of thousands of pounds.

As with any form of credit, borrowers with a good credit history will be able to access the best home improvement loan rates. Borrowers with fair credit ratings will find it somewhat harder – particularly for larger loan amounts – and borrowers with bad credit scores are likely to find it difficult to borrow at a competitive rate.

What type of loan is best for home improvements?

A home improvement loan can be secured or unsecured.

A secured loan is one where the lender takes an asset (in this case, usually your home) as security, meaning that if you fail to make your monthly payments in full, the lender can take ownership of that asset in order to recover its loss. Because they’re safer for the lender, you can borrow much more than you could with an unsecured loan, so they can be suitable for big, expensive projects such as loft conversions.

An unsecured home improvement loan does not have this protection for the lender, making it much less likely that you will lose your home should you fail to make full repayments. Of course, there are still other serious consequences to missing payments (the lender will pursue you through other means, and you’re likely to find it extremely hard to access credit in future), but unsecured loans have much better protection for you, the borrower.

Unsecured personal loans are suitable for improvements like a new kitchen or new double glazing, which generally cost lower amounts.

Koyo’s loans are unsecured and allow you to borrow up to £7,500.

How hard is it to get a home improvement loan?

Getting a home improvement loan shouldn’t be any more difficult than getting any other form of loan, although there are two factors that you should consider:

  •  If you’ve recently bought a home and used a mortgage, it’s likely that you will have stretched yourself financially. If that’s reflected in your finances, a loan might look unaffordable, making it (temporarily) harder to get new credit.
  •  However, if you’ve owned your home for a while and your mortgage payments are comfortable, that looks great to a lender. Owning a home and making repayments on your mortgage means you’re seen as a relatively safe borrower (all other things being equal).

If you’re considering a secured loan, you’ll need an asset to be taken as security. Since this will usually be your home, you’ll need to show that you have enough equity in your home (calculated by subtracting the value of your outstanding mortgage from the value of your home) for a lender to be comfortable. This doesn’t apply for unsecured loans though: in this case, the total amount you can borrow isn’t related to the value of your home.

Can I get a personal loan for home improvements?

Personal loans for home improvements are very common and are a fairly accessible form of lending. In general, if you can answer “yes” to the questions below, there’s a good chance you’ll be able to get a personal loan for home improvements:

  •  Do I have a track record of repaying credit in full and on time?
  •  Can I show that I would be able to afford the monthly repayments over the full loan term?

Some good borrowers don’t have a track record of repaying credit, simply because they haven’t ever taken a loan out before. If that’s the case, it’s worth considering an Open Banking lender such as Koyo. Instead of looking at your credit history from a credit bureau, these lenders use Open Banking data to view your bank account history and work out how affordable a given loan is for you.

A visual guide to how much you might need to borrow for various home improvements

Source: https://hoa.org.uk/advice/guides-for-homeowners/i-am-buying/house-renovation-costs/

What’s the cheapest way to borrow money for home improvements?

The cheapest way to fund home improvements will always be to pay in cash. However, that’s not always possible, so in this section, we’ll look at some of the next best options. We’ll start with options for very small amounts (in the low thousands), moving up to higher values.

Credit card

If you can access a 0% credit card, this can be a very good way to pay for home improvements, particularly since you’ll benefit from Section 75 protection on the works.

However, there are a couple of potential drawbacks:

  •  If you’re not able to repay the balance in full during the 0% period, it’s likely that the rate will increase very sharply, which flips it into an expensive form of credit.
  •  Many tradespeople prefer not to take payment from a credit card, since they’ll face a higher transaction cost themselves.

You should bear the first point in mind when considering using a credit card for this sort of purchase, and speak to tradespeople in advance to establish whether they’re comfortable taking payment via a credit card.

Current account overdraft

Again, for small amounts, using your overdraft can be an efficient way to pay for home improvements, but only if the rate is extremely low and you’ll be able to pay it off in a short period of time.

Bear in mind though that an overdraft is usually intended as a buffer. If you use that buffer to fund home renovations, you might be caught out if something unexpected happens to you (if your car breaks down or you need a new boiler, for example).

Home improvement loan

The lowest home improvement loan rates are around 3% representative APR, and personal loans don’t suffer from the drawbacks mentioned above:

  •  Repayments are fixed over the lifetime of a loan – what you see is what you get.
  •  Since you get the loan as a lump sum, you don’t need to use a credit card to pay tradespeople.
  •  You also won’t need to dip into your savings, meaning you can keep money back for emergencies.

As explained above, these can be secured or unsecured – secured loans are riskier for the borrower, but usually allow you to take out a larger loan, while unsecured loans are safer for the borrower.

Add the balance to your existing mortgage

One other option to consider for larger improvements is increasing the amount you borrow on your mortgage.

For example, you might have £100,000 outstanding on your mortgage. If you need £50,000 to fund a large home improvement project, you might be able to find a mortgage lender willing to lend you £150,000. This would allow you to remortgage, giving you extra capital to fund your home renovations.

Related post: Financing Home Improvements: Remortgage Or Personal Loan?

This isn’t necessarily a cheap way to borrow, since there are usually fees involved, and mortgages are generally repaid over periods of up to 30 years. However, as a result, repayments can be more manageable, since the amount of money you borrow upfront is spread over a longer period.

Rather than remortgaging, it’s possible that your existing mortgage provider might be willing to lend you more money.

In either case, it’s worth remembering that – unlike for a personal loan – mortgage interest rates may be variable. That means that your monthly repayments may not be fixed, so they can increase (or decrease) over time. Personal loan repayments are always fixed, meaning that you know exactly how much you’ll need to repay, and when – you won’t be switched to a higher interest rate part way through the agreement.

Check out our guide on borrowing extra money on your mortgage to fund home renovations

How do I get a home improvement loan

The process for getting a home improvement loan is actually very simple since they work just like any other personal loan.

Here are the steps you’re likely to need to take for a personal loan in the UK :

  1. You’ll need to scope out the budget (the Homeowner’s Alliance has a useful guide to renovation costs that you can use as a starting point). Be sure to include materials, labour and a buffer in case the project goes over budget.
  2. Once you know how much the project will cost, you’ll have an idea of how much you’ll need to borrow. If you have cash savings available, you should usually use these to reduce the borrowing, as this will then reduce your interest payments.
  3. You can then find a lender, taking your pick from hundreds of lenders. You should use a loan calculator to get a clear idea of what your repayments will be.
  4. Once you’re approved, you’ll receive your loan as a lump sum.
  5. You can use this money to pay for your improvements, making monthly repayments until the balance is paid off.

How to compare home improvement loan rates

It’s actually not that easy to compare different types of lending . For example, which of the three options below is cheaper:

  •  A credit card that charges 20% APR with no fixed repayment date?
  •  A personal loan that charges 15% APR, repayable over 3 years?
  •  Adding money to your mortgage, at 3% but repayable over 25 years?

Comparing within a certain lending type is pretty easy: you don’t need a maths degree to know that a 5-year loan at 15% is cheaper than a 5-year loan at 20%. Comparison sites make this even easier, instantly showing you hundreds of options, and our loan calculator makes it easy to see repayments.

If you’re comparing different borrowing types, your goal will generally be to minimise the total amount you repay, while ensuring that monthly repayments are affordable. Credit providers will generally tell you how much you’ll repay (at Koyo, we always make this clear), and to do the same with a credit card, you can use a credit card repayment calculator. Armed with this knowledge, you’ll be able to see how the cost of borrowing compares, and make the best decision for your circumstances.

Summary

To recap, there are several ways to fund a home improvement project, and it’s worth considering how much you want to borrow, how long you want to borrow for and what products you’re likely to be eligible for.

If you think an unsecured personal loan could be a good option for you, it’s worth starting to take a look at what’s out there. Our loan calculator is a great place to start.