If you are considering some home improvements in the near future, you may be tossing up between a home improvement loan or remortgage to finance them. In this guide, we look at both of these options to help you decide the most suitable and preferential way to fund your renovations.
What’s the best way to borrow money for home improvements?
Two of the best ways to borrow money for home improvements is to use a home improvement loan or to remortgage. These options might allow you to borrow enough even for larger projects, and you may be offered a competitive interest rate.
Another option is to use a home equity loan, which we discuss towards the end of our guide.
What is a home improvement loan?
Home improvement loans are a type of personal loan exclusively used to fund home improvements and renovations. This could be something as simple as updating electrical goods and furniture, or it could be complex building work as part of an extension, loft conversion or new kitchen.
To be approved for a home improvement loan the lender will need to assess your finances, debt to income ratio and your credit score. Only apply for one of these loans with a lender that is authorised and regulated by the Financial Conduct Authority.
How does a home improvement loan work?
Home improvement loans will give you a lump sum amount that is repaid with interest through fixed monthly repayments over a specified period of time. Once all monthly repayments have been paid in full, the loan has been paid off.
There are two types of home improvement loans, namely an unsecured home improvement loan and a secured home improvement loan. Unsecured loans do not list assets as collateral within the credit agreement while home improvement loans typically use the property or home equity as collateral. This means the lender has an automatic right to force the sale of the asset if you fail to repay.
Although a secured personal loan creates a potential risk of foreclosure, it reduces your lending risk and could therefore help to secure more credit and/or lower interest.
Can I remortgage to do home improvements?
Yes, it is possible to remortgage to release equity and use the money for home improvement projects.
Remortgaging is when you swap your existing residential mortgage for a new one. Most people remortgage for better repayment terms, predominantly for lower interest rates. This works by taking out a new mortgage that borrows an equal amount of your existing mortgage balance. This money pays off the first mortgage leaving you with the new mortgage only. Now you owe the same amount but with lower interest applied.
There may be early repayment fees for paying off your first mortgage early.
Remortgaging to complete home improvements is quite straightforward. Instead of asking for a new mortgage with an equal value to the amount owed on the first mortgage, the homeowner asks for some additional borrowing secured against their home equity.
Home equity is calculated by subtracting your current mortgage balance away from the value of your home.
How to remortgage for home improvements?
Remortgaging for home improvements requires the homeowner to search the market for suitable providers and ask to borrow more against home equity. It is best understood with an example.
If you have a home worth £220,000 and have a remaining mortgage of £70,000, you have £150,000 home equity. Instead of asking for a new mortgage of just £70,000, you might want to ask for a mortgage of £100,000, securing an additional £30,000 of the loan for home improvements. Naturally, you’ll need adequate home equity to be able to do this.
Seniors may also want to consider a lifetime mortgage.
Should I use a home improvement loan or remortgage?
So, should you use a home improvement loan or remortgage to pay for home improvements? The answer to this question can only be answered by each individual, as personal circumstances will dictate the best option – as well as the loans and mortgages available to you.
Looking at the various interest rates is important, but you should also consider any other fees and charges. One of the biggest to consider when choosing to remortgage are early repayment charges on the first mortgage. If you pay off the first mortgage with a new mortgage early, that lender could charge you a significant amount as a type of penalty.
On the other hand, using a home improvement loan will be separate from your existing mortgage and you won’t be paying it off. Thus, there will be no early repayment charges to pay.
Can I take equity out of my house for home improvements?
You can take equity out of your home to finance home improvements.
Another way to utilise home equity for home improvements – which doesn’t involve remortgaging -is to use a home equity loan. This is a standalone loan separate from your mortgage. It is secured against available home equity, meaning the loan provider could force you to sell the home if you do not keep up with loan payments in full.
We’ve completed a more in-depth comparison of home equity loans and mortgages here!
These loans typically have closing costs attached to them, which can be an added expense at the end of the loan term that is not always applied to home improvement loans.
How should I fund home improvements?
There is no straightforward answer to say whether you should use a home improvement loan or remortgage to pay for home improvements. The decision should be based on personal circumstances and the remortgaging options and home loans available to you.
Make sure to search and compare extensively to uncover the best deals. You might want to employ a mortgage advisor for professional support.
More info on how to remortgage to fund home improvements
Stacks more information on funding home improvements is available with MoneyNerd. We’ve released plenty more articles and guides on the various ways to pay for home renovations. Check them out to make an informed decision by considering all options!