Should you borrow more on your mortgage to fund renovations?

Home improvements can be very expensive. They’re also one of the best investments you can make – good, thoughtful home improvements will make a real difference to your quality of life, and in some cases, they will add enough value to your home to pay for themselves if you later decide to sell.

One way to fund home improvements is to borrow extra money on your mortgage to fund renovations. It’s a somewhat complicated way to borrow though, so in this article, we’ll explain what steps are involved and how you can decide whether it’s a good option for you.

If you’re considering a smaller project (£1,500-12,000) and are debating whether you should borrow extra on your mortgage or get a personal loan, you can take a look at our loan calculator or make an application at www.koyoloans.com. Representative APR 27%.

And if you want to read more about how to borrow money for home renovations with a personal loan, you can also take a look at our full guide to how to get a loan for home improvements.

For more information on adding to your mortgage though, read on!

Can you borrow extra money on your mortgage for renovations?

Yes, absolutely – borrowing extra on your mortgage is a pretty common way to fund major home improvements, such as renovating part of your house, adding a loft conversion or putting in a new kitchen.

Here’s how it works:

• Let’s say you bought your house for £100,000

• You currently have £50,000 outstanding on your mortgage

• If you remortgage and increase your borrowing to £75,000, you’ll be able to pay off the existing mortgage and still have £25,000 to spare

• You now have £25,000 to fund home improvements

While it sounds simple when you list it out like that, there are a few complications when you’re considering this in practice. We’ll cover these in more detail later in the piece, but very quickly:

1. It can be expensive to remortgage – you’ll face fees, and may be locked into a specific term (for example if you’re on a 5-year fix)

2. You’ll need to have built up sufficient equity in your home

3. If increasing the size of your mortgage puts you in a higher LTV bracket (more on that later!), you could end up paying a higher interest rate on the whole amount

3 ways to borrow more on your mortgage for home improvements

Before we get into the real detail of remortgaging to fund home improvements, we’ll take a quick overview of all the mortgage-linked options that are likely to be available to you.

Remortgage to fund home improvements

This is what we covered above – you replace your existing mortgage with a larger one. After paying off the initial mortgage, you use the extra cash to fund your home improvements.

We’ll cover it in full later on, but if you want even more detail, you can take a look at our full article: remortgaging for home improvements.

Further advance

A further advance is a way to increase your borrowing from your current mortgage lender. Usually, the extra money you borrow is repayable at a different interest rate.

Not all lenders offer further advances, but if they do, it can be more straightforward than remortgaging and might save you money on fees. You’ll need to speak to your existing lender to find out if it’s something they offer – typically you’ll need a loan-to-value (LTV) ratio of 85% or lower.

The big advantage over remortgaging is that you don’t need to wait until your mortgage term ends (e.g. until the end of your fixed period, if you have a fixed-rate product).

Second charge mortgage

A second charge mortgage is a little more complicated – in this case, you’re actually taking out a second mortgage, almost always with a new lender, meaning that you’ll have two mortgages to repay.

The “second charge” refers to security: your original lender will have a first charge on your home, which means that if you fail to repay, it can take your property and sell it to make a recovery. Your second lender can do the same but is second in line, so is taking more risk.

You’ll need to have built up a lot of equity in your home for a second charge mortgage to be possible. And one thing to be aware of is that if you move home, you’ll need to move not one but two mortgages with you, resulting in fees and extra admin.

Is borrowing extra on your mortgage the best way to finance home improvements?

What’s right for you might not be right for everyone else, so in this section, we’ll run through a few questions to ask yourself in order to help you decide how to pay for home improvements.

Can I afford the extra monthly repayments?

This is the most important question that homeowners need to ask themselves. If you fail to make full monthly payments on your mortgage, your home is at risk, so it’s essential that you only borrow what you are confident you’ll be able to repay. It’s also crucial to consider upcoming life events – such as having a child, changing jobs or retiring – that could affect the affordability of your mortgage.

Is it the cheapest way to borrow money?

Mortgage debt is repaid at a very low rate of interest – which is a good thing – but is repaid over a long period of time (typically decades), which means that those mortgage payments really add up.

For example, if you borrow £10,000 at 2.5% and repay it over 25 years, you’ll pay £3,459 in interest. In some cases, it can actually be cheaper to borrow at a higher rate but with a shorter term. A loan calculator can be a good place to start if you want to look at options.

You’ll also need to consider fees – taking out a new mortgage or extending your existing one will usually involve costs in the hundreds or thousands of points, adding significantly to the total amount you’ll ultimately repay.

Can I remortgage at the moment?

If you’re locked into a fixed rate deal with your current mortgage, it’s generally very expensive to switch deals – you’ll usually face an early repayment charge that can run into the thousands or even tens of thousands of pounds. For that reason, unless you’re on a floating deal or are heading towards the end of your agreement anyway, it’s unlikely to make financial sense to remortgage immediately.

Do I have enough equity in my home?

If you’re buying a home for £100,000, a bank doesn’t want to lend you the full amount. That’s because it wants to have a safety cushion – if it lends you £80,000 and things go wrong, it has a £20,000 safety cushion, meaning that it can feel reasonably confident of making a full recovery.

The bigger the safety cushion, the lower the loan-to-value ratio (LTV) – this is calculated as the value of the loan divided by the value of your home.

In the example above, you’d divide £80,000 by £100,000 and get 80%, which is a pretty good LTV. If you borrow more, you’ll increase your LTV, and you’ll be a less attractive borrower – most banks won’t approve a loan with an LTV above 90%.

If you have a high loan to value ratio, you won’t be able to borrow more (and will need to reduce it – ultimately by paying off more of the mortgage) in order to change that.

One other thing on LTVs: as LTVs rise, so do mortgage rates. So if you increase your borrowing from 40% LTV to 90% LTV, you can expect the rate payable on your whole mortgage to increase.

An alternative to borrowing more on your mortgage: home improvement loans

A home improvement loan is just another word for a personal loan that you use to fund home renovations.

An unsecured personal loan is a good alternative to remortgaging, provided that you’re only looking to borrow a relatively small amount (typically £20,000-30,000 or less). You can borrow a lump sum, independently from your mortgage, which you repay in monthly instalments.

Personal loans generally carry a higher interest rate than mortgages, but because they’re repaid over shorter periods (usually a few years), they can actually be cheaper overall. And fees are usually low or non-existent (Koyo loans have no hidden fees).

Like credit cards, they’re also unsecured, meaning that you take on less risk as a borrower.

The main drawback is that unsecured personal loans are usually capped at a maximum of £20,000-30,000 (Koyo offers loans of between £1,500 and £12,000), meaning that for really significant improvements, you might not be able to borrow enough. But for smaller improvements, a home improvement loan can be a nimble solution.

For more information, take a look at our guide to how home improvement loans work, and if you’re worried about your credit rating, you might also find our article on how to get a personal loan with a bad credit score useful.

Next steps

As with any financial decision, the most important thing to do is to understand your options. Having read this guide, you’re part of the way there – the next step is to look at some real products to get a sense of pricing and how they compare.

If you’re looking at financing renovation projects 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%.

And to get a feel for deals on remortgaging for home improvements, it’s best to look at one of the comparison sites, such as Moneysupermarket or Uswitch.

Lastly, if you’re looking at funding a specific project, we have a couple of more detailed guides which you might find useful:

• How to pay for a new roof

• How to pay for a new kitchen

Frequently asked questions about additional borrowing on your mortgage for home improvements

Can a mortgage include renovation costs in the UK?

Yes – as we’ve explained above, it is possible to increase your borrowing in order to cover the costs of renovations, but the key thing to consider is that you’ll need enough equity in your home for your lender to feel comfortable. Typically, that means your mortgage must be less than 90% of the value of your property.

How much can you add to your mortgage for renovations?

Assuming you’re a borrower in good standing with a decent credit score, the amount you can add to your mortgage is mainly determined by the loan-to-value (LTV) ratio. Banks generally like to keep this below 90%, so if you’re already at that level, you’re unlikely to be able to borrow more. However, if you’re much lower (40%, for example), then you have lots of room for manoeuvre.

One interesting thing about this is that your LTV ratio is affected by your property value. So if your property has increased in value since you bought it, your LTV will be lower, making it easier to increase your borrowing.

Can you get a mortgage for more than the purchase price for renovations?

Generally not, unless you’re a specialist property developer, and these loans tend to come with strict terms and high costs. Ordinary borrowers can usually borrow up to 90% of the value of a property.

What can you use the additional money for when you extend your mortgage?

You can actually remortgage to free up cash for lots of different uses, not just for home improvements. Here are some examples:

• Home improvements

• Buying a share in the freehold of your property (if it’s a leasehold)

• Buy out a partner’s interest

• Purchase additional land

• Repay other unsecured debts

It’s worth reiterating that a mortgage is a form of secured debt, and failing to pay it off in full could mean that you lose your home – so you should always think carefully and explore your options before increasing your borrowing.