The ultimate guide to financing your next home improvement

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In 2018, over 4 million households in the UK made the decision to improve their home one way or another, and maybe you’re thinking of joining.

Whether you need a loft conversion, an extension, or a new kitchen or bathroom – starting a home improvement project can be a little overwhelming.

There are a whole host of things to think about including how to finance your home improvement. Budget is key as you’ll need to know how much money you’ll have to play around with, and whether you can expect to receive any return on your investment.

So, before you start picking out new floor tiles or wallpaper, you’ll need to weigh up the best finance option for your project. And, rather handily, we’ve broken each one down for you already, because we’re good like that. 

 

What is the best way to finance home improvements?

 

  1. Savings
  2. Second charge mortgage /Secured Home Improvement Loan
  3. Unsecured Home Improvement Loan
  4. Remortgage

 

Using your savings to pay for a home improvement

 

If you’ve been staring at a wonky kitchen unit for years, chances are you’ve also been saving for a brand spanking new kitchen with beautifully aligned cupboards for years too. 

Using your own savings to pay for a home improvement means you won’t owe any money once the work is completed.

Plus, your fully paid for home improvement may add extra value to your home, helping to recover some, or all, of the savings you put into it.

Let’s say the value of your home is £200,000, and you’re looking at a kitchen renovation of

£10,300, based on the average kitchen renovation spend from the Houzz Trends Study 2018.

According to the Hiscox Renovations and Extensions Report 2018, the average value added to a home by a renovated kitchen is 5.5%. That means your £200,000 home would, theoretically, increase in value by £11,000 to £211,000.

Ta dah! Your £10,300 kitchen renovation has paid for itself … if you come to sell the property.

Of course, it’s worth noting that making a return on the investment is not typically the primary reason for any home improvement. And, not every kitchen will cost £10,300 or add that level of value (if any) to your home. To get a better idea of the potential “ROI” of your renovation, it is recommended you seek a professional valuation.

 

It’s good to remember, the total amount paid for the project is likely to vary, depending on its scale and complexity, your personal circumstances and the specific terms of the savings account you hold.

It’s worth bearing in mind that depending on the type of savings account you have, you might find you have to pay a withdrawal fee to release the funds you need, which could eat into the overall budget for the project itself.

Using your savings to pay for your home improvement may be the best option if…

  • you already have enough or part of the money available in savings
  • you want to avoid paying interest on loan repayments
  • you want to avoid long term finance options like re-mortgaging
  • the project is likely to add value to your property that may recover some or all of the savings you invest

Using your savings to pay for your home improvement might not be the best option if you…

  • want to avoid paying withdrawal fees on your savings account, if a withdrawal or penalty fee applies
  • You are saving for something else which is important to you and this would delay the purchase of it

Using a second charge mortgage (secured loan) to pay for a home improvement

 

A second charge mortgage (also known as a secured loan), works by using your home as collateral to borrow money and in this case, it would be used for your home improvement project.

Because a second charge mortgage is seen as a less risky option for lenders (as they can seize the collateral if the loan isn’t repaid), borrowers could benefit from lower interest rates on re-payments and access to higher loan amounts.

Choosing a second charge mortgage means you still own your property. Responsible money lenders will want to make sure you can afford the repayments, using repossession of your property only as a last resort to recover their loss if you’re unable to repay the loan.

Borrowing money is a serious matter, so before you commit to an agreement, think carefully about whether you can afford payments over the entirety of the loan period. This can include taking into account second charge mortgages that change from a fixed rate to a variable rate after a period of time as the interest rate may rise and the cost of credit could increase throughout the loan term.

A second charge can offer a great alternative to re-mortgaging as you can keep your first charge mortgage in place. They’re especially good if you can get a favourable interest rate and don’t want to lose your first charge mortgage.

You can find out more about Shawbrook’s second charge mortgage loans here.

If you are planning a small home improvement with a lower budget, then an unsecured personal loan might be just the thing for you. It’s worth bearing in mind though, that all loans are subject to status, and we cannot guarantee approval.

Using a second charge mortgage to pay for your home improvement may be the best option if you…

  • wish to access a larger loan amount for a big home improvement project
  • want to spread your re-payments over a longer time frame than a personal loan may cater for
  • have complex circumstances. For example, if you are self-employed or have irregularities on your credit

     

     

Using a second charge mortgage to pay for your home improvement might not be the best option if you…

  • are planning a small home improvement and you can get a better rate with another form of credit
  • don’t have enough equity in your home to cover the amount you would like to borrow

Warning: THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

 

 

Using a personal loan to pay for a home improvement

 

An unsecured loan, or a personal loan, differs from a secured loan as the lending isn’t protected by any of your assets (typically your home).

By using a personal loan to pay for a home improvement, you can pay back the full amount plus interest over an agreed timescale typically over 1 to 7 years with loan amounts usually ranging from £1,000 - £35,000.

Anyone who is 18 years old or over can apply for a personal loan but whether you’ll be accepted and the rate you’ll subsequently get offered will depend on the lender you apply with, their application criteria and your current financial circumstances and credit history. 

Let’s say you meet our eligibility criteria, we accept your application and offer you a guaranteed loan APR of 13.9% for your £10,300 kitchen renovation.

In this example scenario, your final breakdown might look something like this:

 

Representative Example  
Representative APR* 13.9% (fixed)
Loan Amount £10,300
Loan Term 5 years (60 months)
Annual Interest Rate 13.9% p.a. (fixed)
Monthly Payment £234.81
Total to Repay £14,088.59

*Note: The APR you are offered could differ depending on the lender you choose to borrow from and will also depend on their assessment of your financial circumstances.

 

Interest rates will vary between lenders and are based on the amount you would like to borrow, how long you would like to borrow for and your personal circumstances. If you’re curious about the interest rate you’d be offered you can get a quote for your personalised rate from Shawbrook here.

Using a personal loan to pay for your home improvement may be the best option if you…

  • have a good credit history
  • wish to borrow between £1,000 and £35,000
  • can pay your loan off over a shorter timescale (usually between 1 – 7 years)

     

     

Using a personal loan to pay for your home improvement might not be the best option if you…

  • have a poor credit history
  • have unusual employment circumstances or are unemployed
  • need a longer timeframe to make your repayments

Remortgaging to pay for a home improvement

 

Re-mortgaging allows you to borrow money against your home to pay for home improvements. Getting a new mortgage deal can release the equity in your home, covering the existing value of your current mortgage as well as the amount needed for the home improvement.

Home equity is a homeowner's interest in a home, it is essentially the portion of your property you ‘own’. It can increase over time if the property value increases or the mortgage loan balance is paid down.

Things like the level of equity you currently hold in the property, your individual circumstances and the property type itself, can all affect the amount you can borrow for your home improvement.

Something else worth thinking about is that re-mortgaging means you’re increasing the amount of borrowing secured against your home, so you’d need to be sure you can afford to keep up with repayments or you could be at risk of losing your home

If you’re planning a large home improvement projects, re-mortgaging might be a good option to help organise your repayments into a single loan.

If you’re planning a smaller home improvement project, you could end up paying more in interest over many years on a long-term mortgage deal, compared to a higher interest rate personal loan paid over a shorter timescale.

On our hypothetical £200,000 home, there is £150,000 outstanding on the existing mortgage and you need £10,300 for the kitchen renovation. A mortgage lender may be able to lend you £160,300, so you can pay off the £150,000 mortgage balance, leaving you with enough to carry out the work on your new kitchen.

Our hypothetical kitchen renovation costs don’t take into account individual circumstances, the loan to value (LTV) ratio, the mortgage provider, or the project size.

We recommended you seek professional guidance from a qualified mortgage advisor if you’re considering re-mortgaging.

Remortgaging to pay for your home improvement may be the best option if you…

  • Want to pay for your home improvements and your mortgage as a single payment
  • Have a large home improvement project planned
  • Can afford to pay the larger repayments over a potentially longer repayment period

 

 

Using a personal loan to pay for your home improvement might not be the best option if you…

  • are happy with the mortgage deal you already have
  • Have a small home improvement project planned
  • Cannot afford the larger repayments

Warning: THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

 

Things to consider when financing a home improvement

There are several different options to choose from when looking to finance a home improvement project including using your own savings, getting a secured loan, getting a personal loan, or re-mortgaging, but the best finance option for your project will depend entirely on your own personal situation.

The hypothetical examples used in the guide are for illustrative purposes only, and your individual circumstances and the specifics of your project will help to inform the terms of your loan agreement, if you choose to go down this route.

If you’re interested in what your personalised rate would be for the personal loan option, you can check that while you’re here and get a free quote that won’t affect your credit score

If you’re still unsure whether a home improvement loan is the right choice for you, you can find out more about them here to help you make up your mind.