If you are looking to make home improvements in the near future, from modernising the décor or building extensions to create more space, you will need to find a way to fund your plans.
Making renovations to your house or flat can be expensive, and could take a long time to save up for. This is why a personal loan can be a popular option.
A personal loan is a sum of cash from a bank or other lender that’s not secured against your property or any other asset. That makes it ‘unsecured’ and it can be a relatively cheap way to borrow a large sum of money.
What is a ‘home improvement’ loan?
It’s essentially an unsecured loan which you can use to fund home renovations. It just involves a lender asking for a ‘loan purpose’ as part of the online application process and where you specify what you’re planning to use the money for.
The term ‘home improvements’ covers all sorts of changes you might want to make to a property, ranging from ‘cheaper’ jobs, such as redecorating and revamping the garden, through to more costly work, such as installing a new kitchen or adding a conservatory or extension.
How much can you borrow on an unsecured loan?
It’s possible to borrow up to £25,000 via a personal loan, although the amount actually borrowed for a home improvement personal loan is commonly around £10,000 to be paid back over five years.
For this amount over this period, you can currently obtain interest rates around 3%.
It may sound counter-intuitive, but rates tend to be cheaper for larger loans than for smaller sums, so bear this in mind when deciding how much to borrow.
How do I get a home improvement personal loan?
The best approach is to go online and compare deals from a wide selection of lenders to find the cheapest rates available to you.
You will need to know the amount you want to borrow, and over what period you want to repay that money.
When you apply online, you may be able to get a decision almost instantly. If you are successful, you could get the money in your account in just a matter of days, or in some cases, even sooner.
Is it worth getting a home improvement loan?
Unless you are in the lucky position of having the necessary cash to hand, a home improvement personal loan can make good sense. An unsecured personal loan will have fixed terms and fixed interest rates. This means you may be able to carry out a whole raft of home improvements with just one affordable loan.
What are the downsides?
When applying for a personal loan, you may not qualify for the low rates that are being advertised, as lenders are not legally obliged to offer cheap headline rates to more than 51% of applicants.
The deal you get will depend on your personal circumstances and credit history, so the rate you actually get could be much higher.
Equally, as you are not putting up your home or another asset as security, you may not be able to borrow as much as you would with a secured loan (see below).
In addition, you need to be aware that there may be a penalty if you want to repay a personal loan early.
You also need to check the Ts and Cs carefully for any other fees.
What about taking out a secured loan for home improvements?
The other type of loan you might want to consider to fund your home improvements is a ‘secured loan.’ This type is tied to one of your assets – usually your property.
As you are providing collateral, there is less risk to the lender. As a result, it may be easier to get a secured loan than a personal loan – even if you’ve got blemishes on your credit history.
How much can you borrow on a secured loan?
Secured loans are typically for longer periods than personal loans, ranging from five years to as long as 25 years. They are also usually for larger sums, often over £15,000 – and potentially a lot more.
Interest rates on a secured loan can sometimes be lower than those on a personal loan. But once again, the rate you actually get will depend on your personal circumstances and your credit rating.
What are the dangers?
If you put up your home as security, you risk your property being repossessed if you can’t keep up with repayments on your secured loan. With this in mind, it’s important to ensure any work you are undertaking is affordable both now and in the long term.
Further, there may be less flexibility than with an unsecured loan when it comes to things such as overpayments or paying back your loan early.
Check eligibility before applying
When applying for any type of loan, you need to be careful not to make too many searches, as these will leave a mark on your credit file. This could make lenders less willing to lend to you.
Make use of eligibility tools which carry out a ‘soft credit search’ to show you which deals you are most likely to get accepted for without impacting on your credit rating.
What are the alternatives?
The right credit card. For example, a deal offering a generous 0% window on cash or purchases which gives you time to pay off the money you spend. But note, that when the card’s interest rate reverts to normal levels, costs can soar
Remortgaging. If your mortgage deal is coming up for renewal, you could switch lenders and top up your loan in the process (income and circumstances permitting). If you can access a much cheaper mortgage rate in the switch, you’ll offset some of the cost
Further advance: You may also be able to take out further borrowing on your current mortgage. Speak to your lender to see if this is a possibility. You will need to demonstrate you can keep up with repayments on the larger loan – and be confident the work will add value to your home
While you may be embarking on home improvements in the hope the money you invest will translate into increased value when you come to sell it, don’t assume this will be the case.
Some improvements will enhance your home’s potential, but not all will.
For example, adding a conservatory or converting your garage into a bedroom or home office can add value by giving you extra living space.
By contrast, projects such as landscape gardening or getting solar panels installed can cost a lot, while not actually adding that much value.
The key is to plan carefully and fund home improvements in the most affordable way – making sure any costly work you undertake adds genuine and lasting value.
What is a home equity loan?
Home equity loans, sometimes referred to as second mortgages, are often used by borrowers to make improvements to their homes. They are a type of secured borrowing that use the property in question as collateral. To assess the amount they will loan, lenders compare the current value of the house in question and compare it with the amount of debt outstanding on that property. They will also factor in a borrower’s debt-to-income ratio (i.e. regular outgoing payments, compared with monthly income) as well as his or her credit score.
Can I remortgage for home improvements?
Yes, but do your sums before making a commitment. Adding an amount earmarked for home improvements to a mortgage can be a cheaper option than relying on other forms of finance (such as personal loans, or paying by credit card for the work that gets carried out). You should also be able to repay the amount over the remaining term of the mortgage, rather than the two, three or five-year periods more commonly associated with personal loans.
Deciding to remortgage by switching deals halfway through the life of an existing home loan can be expensive, however, with the potential for costly early repayment charges.
Can I use a pre-approved loan for home improvement?
Yes, it’s just the nature of the loan that’s different in this situation compared with other forms of lending. With a pre-approved loan, a lender indicates to a customer that it will lend the money based on the up-front information provided, as long as fraud checks are passed and the application details are correct.
Almost all pre-approved offers come with a guaranteed annual percentage rate. This means that the interest rate offer the customer receives for the loan, rather than being just a representative figure, is the rate that they will end up paying.