Financing home improvements: remortgage or personal loan?

Home renovations can be very expensive – there are no two ways about it, and it’s not surprising that many homeowners choose to remortgage to pay for home improvements.

Improving your home can be one of the most rewarding ways to spend your money. Naturally, home improvements can improve your quality of life, but they can also help to earn or save you money:

1. Some (but by no means all) improvements add meaningfully to the value of your property – so much so that they can pay for themselves if you ever decide to sell.
2. If you can improve your home – rather than move house – you can save yourself a huge amount of money (stamp duty, legal fees and moving costs, before you’ve even thought about the cost of your next place) and hassle.

So it’s not surprising that many homeowners are prepared to fork out, whether it’s for a new bathroom, an extra bedroom or even a loft conversion.

However, not everyone is lucky enough to have enough money lying around to cover the cost of those improvements, and so many people want to know the best ways to fund home improvements.

In this article, we’ll go into more detail on remortgaging, which remains one of the most common ways people fund major home improvements. Along the way, we’ll also touch on some of the alternatives, including personal loans and credit cards.

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

If not, read on!

What options do you have to fund your home renovations?

In this section, we’ll run through the most common ways to fund home renovations – we’ll just give a quick overview here though, and will go into more detail later in the piece.

Cash savings

Paying for a project using savings is a great option – if your financial circumstances allow it. That’s because by avoiding debt, you also avoid interest payments, saving you money, and won’t have to worry about a monthly bill.

Unsecured personal loan

An unsecured personal loan can be a useful way to fund improvements for smaller projects (up to a maximum of roughly £20,000, but usually around half that). Unlike a mortgage or secured loan, your home is not at risk if you fail to make monthly repayments, and there’s generally more flexibility if you want to repay early.

The drawback? You’ll pay interest (generally a higher rate than you would on your mortgage) and the term will usually be shorter than with a mortgage. The lowest rates are usually reserved for people with the best credit scores, but there are also some good home improvement loans for people with bad credit scores too.

Secured personal loan

Secured personal loans are used to borrow larger amounts – typically £20,000 or more – over a set term. The reason lenders are prepared to lend more is because if you fail to make repayments, your home is at risk – this is something you should consider extremely carefully, and in general, something to avoid if you can.

Remortgage

We’ll cover this in a lot more detail below, but some homeowners choose to move to a new, larger mortgage and take the excess amount to fund home improvements.

Credit card

You may be able to fund part or even all of a small project using a credit card. Interest rates vary, but some providers offer interest-free periods – however, rates usually increase very sharply as soon as you’re out of that period.

On the plus side, any purchase you make using a credit card is covered by something known as Section 75 of the Consumer Credit Act, meaning the credit card company is jointly liable if things go wrong.

The drawback – aside from the lower limit – is the fact many tradespeople don’t accept credit cards, due to the relatively high fees that credit charge companies charge the sellers.

Remortgaging for home improvements: Is it a good idea?

Remortgaging can be a good way to pay for home improvements, but it’s also a complicated process. In this section, we’ll go into more detail on remortgaging, so you can work out whether it could be a good idea for you.

How does remortgaging work?

Remortgaging is the process of taking out a new mortgage on a property you already own.

This could be to replace your existing mortgage (to switch to a new deal), or – if you don’t currently have a mortgage on your home – to borrow money, using your home as security.

So how can remortgaging fund home improvements? It’s best illustrated with an example:

Let’s say you have a house, with a value of £200,000, and a mortgage of £100,000 outstanding to your current lender. That gives you a loan to value ratio (LTV) of 50%, which most mortgage lenders will be very comfortable with.

If you could find a mortgage lender willing to lend you £120,000, you’d be able to use the £100,000 to pay off your existing mortgage, and the additional £20,000 to fund improvements on your home.

There’s a bit more to it than that though, and some pitfalls to watch out for – we’ll cover the pros and cons below, and if you want to go into real detail, take a look at our full guide: how do home improvement loans work.

Remortgaging for home improvements: pros

If you’re able to increase the size of your current mortgage or switch to a new mortgage deal, this can be a way to borrow at a relatively low rate (although you might still end up paying more overall – more on that below).

Adding debt to your mortgage means repayments are spread over a very long period. That does increase the total interest you’ll pay, boosting affordability, but your additional monthly repayments will be lower than they would be for a personal loan.

Remortgaging for home improvements: cons

Unfortunately, remortgaging for home improvements has several drawbacks. The first is that even if mortgage rates are low, they tend to be repaid over decades, meaning even a low interest rate really adds up. To quote Martin Lewis (1):

“Borrowing £1,000 at 5% over 20 years is more than twice as expensive as 10% over 5 years”

Martin Lewis

Remortgaging is also a fairly complex process. If you’re on a fixed-rate mortgage, it will usually be very expensive to switch partway through the term, as mortgage lenders usually levy very hefty early repayment charges.

Even if you’re at the end of your term, or on a variable rate (also known as a tracker) mortgage, you’ll still face fees for switching, which can easily add up to thousands. You might also need to pay for a new valuation.

And then there’s the issue of LTVs (loan to value ratios). Generally, the higher the value of your mortgage in relation to the value of your home, the higher your interest rate.

If your home is worth £200,000 and you have a £100,000 mortgage, you have a 50% LTV ratio, and should be able to access some very competitive deals. If you increase your mortgage balance to £120,000, your LTV ratio increases to 60%, meaning your choice of rates will be slightly more limited and you will likely pay a higher rate.

Of course, the most serious drawback is you’re increasing the amount of borrowing that’s secured against your home. You should think carefully and realistically about your ability to repay and consider any life events that might happen over the full term of the loan – which for a mortgage can be two or three decades.

Related post: Should you borrow more on your mortgage to fund renovations?​

An alternative to remortgaging: Taking out a home improvement loan

For smaller home improvement projects – typically with a cost of around £5,000-£10,000, a home improvement loan can also prove to be a cost-effective solution. As a result, home improvement is a very common reason for a personal loan.

How do home improvement loans work?

A home improvement loan is just an unsecured personal loan you use to pay for improvements to your house or apartment.

There are no bells or whistles. As with any other personal loan, you borrow a fixed amount for a set period, and you make monthly repayments with interest for an agreed period.

Many lenders offer home improvement loans, and it won’t appear as a separate category – you’ll simply need to apply for a personal loan and choose “home improvement” (or similar – for example, you might see it listed as “renovating your home”) when asked for the purpose of your loan application.

We’ve also put together some specialist guides:

• How to pay for a new roof

• How to pay for a new kitchen

Home improvement loan pros

Home improvement loans have several advantages:

Most importantly, unsecured personal loans aren’t secured against your home. That means you’re not putting your home at risk, unlike with a mortgage.

Because the loan isn’t secured against your home, there’s also less admin and paperwork to fill out, and any fees are likely to be much smaller. You also don’t need to worry about the LTV on your mortgage increasing.

You can take out a home improvement loan at any time – unlike with a mortgage, you’re not waiting for your fixed period to end.

As we’ve highlighted above, home improvement loans can also be cheaper than a mortgage for home improvements in certain circumstances – it’s worth using a loan calculator and a mortgage calculator to compare. As a rule, a lower rate is better, but if you’re paying a loan or mortgage off over a couple of decades, a higher rate can still prove cheaper overall if the term on a personal loan is much lower.

Home improvement loan cons

In terms of drawbacks, home improvement loans will almost always carry a higher rate of interest than a mortgage.

Because they’re repaid over a shorter term, your monthly repayments will usually be higher (repayments on £10,000 over 20 years will be many times lower than repayments on £10,000 over 1 year, for example.

In conclusion

While we’ve gone into lots of detail above, the key points are pretty simple:

• Remortgaging can be a good way to fund home improvements, but it does come with some drawbacks – most notably, the admin and fees involved, and the fact that you’re adding debt which you’ll probably be repaying over a decade or more.

• A personal loan usually carries a higher interest rate, but it’s not secured against your home.

• When comparing prices, the rate isn’t the only thing that matters – even a low rate will lead to a very high total interest cost if you’re repaying it over a long period.

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

Frequently asked questions about remortgaging for home improvements

Should I remortgage to do home improvements?

It depends on your circumstances – remortgaging can be a powerful tool, but it isn’t for everyone. A few questions to consider:

• Could I pay for the improvements with cash instead, and avoid increasing my debts?

• Even if the rate is low, would a personal loan be cheaper over the long term?

• Am I locked into my mortgage? If so, when does that period end?

Can you add to your mortgage for home improvements?

It’s possible. One complicating factor is if you’re locked in for a set period (for example if you have a one, two or five-year fixed-rate mortgage), fees will be prohibitive unless you wait until the end of that period (and you’ll still generally need to pay a fee, albeit a smaller one).

Additionally, your loan to value ratio will usually increase, which may have the undesired effect of increasing the rate payable on your mortgage.

So, if you’re also considering a personal loan, take a look at our guide: how to get a loan for home improvements.

Can you release equity for home improvements?

Yes – increasing the size of your mortgage is a way of releasing some of the equity in your home, allowing you to pay for home improvements.

It’s not the only way though – we’ve outlined some alternatives above.

Source:

(1) https://www.moneysavingexpert.com/mortgages/why-remortgage/#:~:text=Remortgaging%20is%20where%20you%20take,should%20or%20shouldn’t%20remortgage.