Are you thinking about fitting a new kitchen or bathroom, converting your loft, making your home more energy efficient or increasing its size with an extension? If so, you need to know your options when it comes to paying for these home improvements.
One way is to use savings but you may not have enough or simply prefer not to use them. Another is to use a credit card but the changes you want to make may cost too much for this. Aside from savings and credit cards, there are various ways to finance home improvements, which we’ll detail below.
How to finance home improvements
It’s important to find the right financial solution for your home improvement project. The type of work you want to carry out and your personal circumstances will affect your decision on this. You may prefer to remortgage, take out a further advance or get a second charge mortgage, for example. If you’re over 55, using an equity release product may be better for you. To make your home more energy efficient, you may find a green loan more beneficial. Or you may want short-term finance, such as a bridging loan or a personal loan.
Remortgage
If you have equity in your property, one way to finance home improvements is to remortgage. Remortgaging allows you to release some of the funds tied up in your home so that you can use a lump sum to carry out the work. This involves changing your current mortgage deal to a new one with a new lender.
Just bear in mind that as you’ll be borrowing more, your mortgage repayments will increase and interest will also be charged on the extra amount borrowed throughout the mortgage term. This makes the cost of your home improvements more expensive in the long run. However, it also allows you to stagger the cost over many years. Once completed, the home improvements should add value to your property.
You should also check what fees are payable if you decide to remortgage. For example, your current lender may penalise you with an early repayment charge, which can be very expensive. Our mortgage brokers will check the rates and fees payable to both your existing lender and the new one so that you can weigh up the costs involved for a remortgage.
Get a further advance
A further advance allows you to borrow more from your current lender. This is in the form of a separate loan to your existing mortgage and is on a first-charge basis. Further advances are typically used for home improvements and you need to meet your lender’s affordability criteria to be approved.
You don’t need to use the services of a solicitor for a further advance so there are no legal costs to worry about. Just be aware that this loan is secured against your property in addition to your existing mortgage. Also, the interest charged is likely to be higher than the rate charged for your mortgage.
Get a second charge mortgage
To borrow a lump sum of money for home improvements without having to remortgage or apply for unsecured lending, a second charge mortgage is another option. This type of mortgage is taken out in addition to your existing mortgage via a different lender. It allows you to use the equity in your property as collateral.
The lender for your primary mortgage has the first charge against your property, meaning they take priority to be repaid if the property is sold. The new lender places a second charge against your property, making them second in line to recoup their funds after your primary mortgage has been repaid. Due to the increased risk for the second lender, the interest rate charged is likely to be higher.
Use a bridging loan
If you prefer a short-term loan to cover your home improvement costs, bridging finance may be the best solution. This is a flexible way to borrow and is quick to arrange. Unlike applying for a mortgage, you don’t need to pass an affordability assessment. Instead, your property or another asset is used as security for the loan and you need to have an exit strategy. This confirms to the lender how the loan is to be repaid at the end of its term.
This type of loan usually has a term of up to 12 months. Due to its convenience and short-term nature, it tends to have a higher interest rate than other loan types.
Get a green loan
If you’re making energy-efficient improvements to your home, you may prefer to use a green loan to pay for them. One option is a green mortgage where the lender rewards you for making your home more energy efficient. For example, you may benefit from a lower interest rate or be offered a cashback incentive.
Another option is to take advantage of the Green Deal scheme. Your home has to be assessed before being approved for a Green Deal loan and you’ll receive a report. This will contain an Energy Performance Certificate, recommended improvements, an assessment of the amount of energy used in your home, an estimate of the savings you could make and details as to whether the lower energy costs would cover the home improvement costs. If you agree to a Green Deal loan, it will gradually be repaid via your electricity bill. If you have a prepayment meter, however, a small daily repayment amount will be deducted instead.
Use equity release
If you’re over 55, you may prefer to take advantage of an equity release product, such as a lifetime mortgage. This allows you to release the equity that’s tied up in your home without having to sell it. Instead of making monthly mortgage repayments, the loan is repaid when you either move into long-term care or pass away and the property is then sold.
The interest is usually compounded so you don’t need to worry about making monthly interest payments unless you want to. The released equity is tax-free and there are no restrictions on how you spend it. This means that you can get all of the home improvements done that you’ve been planning.
Take out a personal loan
Another way to finance home improvements is with a personal loan. This is an unsecured loan and tends to have a higher interest rate. Personal loans are usually repaid over a shorter term than mortgages so, although the rates are higher, they may be less expensive overall. It’s a good idea to compare the costs of a personal loan with those of a different option before making a decision.
Choose the right type of finance for your home improvements
When you want to finance home improvements without dipping into your savings or using a credit card, weigh up the pros and cons of the options available to you. Our mortgage brokers can compare the interest rates, fees, and loan terms of each, providing you with impartial advice. Just give us a call on 01322 907 000 to get started and look forward to getting your home improvements underway.