How does a home improvement loan work?
Getting a home improvement loan may be an attractive idea if you already enjoy low-interest rates on your mortgage and don’t want to remortgage to borrow more against your house.
A home improvement loan (also known as a home renovation loan) can refer to either a:
- secured loan
- unsecured loan
1. Secured loan
A secured loan requires you to use an asset like your home as collateral. This adds a safety net for lenders and usually allows you to borrow a larger sum with lower interest rates, spread over a longer period.
Bear in mind, how much you can borrow also depends on the lender’s criteria and your individual circumstances. If you fall behind on your repayments, the lender could sell your property to claim back funds (as a last resort).
2. Unsecured loan
An unsecured home improvement loan is also referred to as a personal loan and you don’t need to use an asset as collateral. You can usually borrow less over a shorter period – typically under £15,000. Interest rates are also normally higher compared to secured loans. This is due to the increased risk to the lender, as there’s no security attached to the loan
Is a home improvement loan a good idea?
To help you decide whether a home improvement loan is right for you, here are some of the pros and cons you should consider:
Pros of an unsecured home improvement loan
- there’s no need to use an asset as collateral, so you don’t risk losing your home
- you don’t have to take out a loan for as long because the payment periods are shorter
- it may be less stressful if you borrow less compared to a secured loan
Cons of an unsecured home improvement loan
- interest rates are likely to be higher than with a secured loan
- you have access to less money, so you may not be able to borrow enough to cover your home improvements in full
- if you can’t meet your repayment plan, you risk getting late fees and damaging your credit score
Pros of a secured home improvement loan
- you can normally access lower interest rates than with a secured loan
- the longer repayment period may mean your monthly repayments are more affordable
- lenders normally offer larger sums of money than with an unsecured loan, which is beneficial if you have a large home project to pay for
Cons of a secured home improvement loan
- if you don’t make your repayments, your home could be repossessed (as a last resort)
- missed payments will cause your credit score to decrease
- you usually have to pay the loan for longer than you would with an unsecured loan. Extending the term can increase the amount you repay in total
Can I add to my mortgage for home improvements?
Yes, there may be the option to add to your mortgage for home improvements - if you are eligible to do so. This will involve switching your mortgage to a new deal.
When you remortgage, you effectively take out a new mortgage and borrow more on top to pay for your home renovations. This could be a worthwhile move if you can find lower interest rates on a remortgage compared to a home improvement loan.
Bear in mind though, it could lead to higher monthly repayments and/or a longer mortgage term. Early repayment charges may apply if you leave your current deal early. The borrowing is secured against your home, so if you fall behind with your repayments your property could be at risk.
But unlike a secured loan, a remortgage replaces your current mortgage, instead of running alongside it. This means you only have to make one payment per month, instead of paying a secured loan payment on top of your mortgage.
Is it a good idea to remortgage for home improvements?
Whether it’s a good idea to remortgage for home improvements depends on your individual financial circumstances. Look into the pros and cons of remortgaging thoroughly before making a decision.
Pros of remortgaging
- you can save money by finding a better deal with lower interest rates
- if your affordability has changed you could move to a more suitable deal
- finding a flexible deal that allows overpayments could enable you to clear your mortgage quicker in the long run, despite borrowing more in the short term
Cons of remortgaging
- you could end up taking longer to pay off your mortgage if you borrow more
- depending on the market, you might not be able to find a better deal than the one you currently have
- if your credit score is worse and your affordability is lower than when you first took out your mortgage, you may only be eligible for a mortgage with a higher interest rate
What should I consider when looking to fund my home improvements?
There are several factors you need to consider when looking to fund your home improvements, including:
Can you afford the repayments?
You need to know for sure that you can make your loan repayments on time and in full (including interest) for the full repayment term. If you remortgage, your mortgage payments may go up as a result, so you need to factor this into your monthly budget.
Is your credit score high enough to get a good deal?
Having a good credit history should give you access to a wider range of deals with lower interest rates – whether that be for a loan or mortgage. Some lenders specialise in bad credit loans, but you may end up paying more for borrowing money this way.
Alternatively, if your credit score is lower than you’d like, you could work on building it up before you apply, to give you a better chance of approval with more competitive rates. Bear in mind, this can take a while, depending on your starting position.
Do you have savings you can use instead?
It might sound obvious, but it’s best to avoid getting into debt if possible. Plus using savings could save you money, as you won’t have to pay any interest (which you would if you took out a loan or remortgaged).
Are the home improvements essential?
If not, consider waiting and saving some money in the meantime, so you are in a better position financially.
Find a home improvement loan from £1,000 to £500,000
- No up-front fees
- Personal and homeowner loans available
- Check your eligibility without impacting your credit score
Intelligent Lending Ltd is credit broker, working with a panel of lenders. Homeowner loans are secured against your home.
Disclaimer: All information and links are correct at the time of publishing.
