If you are looking to make home improvements – whether it’s extending upwards or outwards for more space, new electrics or just fresh decor – the bill can soon add up thousands of pounds. And, unless you have this cash to hand, you’ll need a way to fund your plans.
One option to explore is a personal loan. 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. And it can be a relatively cheap way to borrow a large chunk of money.
What is a ‘home improvement’ loan?
A home improvement loan is essentially a personal unsecured loan, which you can use to fund home renovations. As part of an online loan application, the lender will ask what you’re planning to use the money for and ‘home improvements’ is listed as one of the options.
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 between £25,000 and £30,000 via a personal loan, although you may well need less than this. Minimum borrowing is usually set at £1,000, although for smaller sums there may be better ways to borrow such as a 0% purchase credit card.
It may sound counter-intuitive, but interest rates tend to be cheaper for larger personal loans than for smaller ones. The very cheapest annual percentage rates (APRs) for example tend to be attached to borrowing of between £7,500 and £15,000. However, don’t this sway you to borrow more than you need.
How do I get a home improvement 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 fortunate position of having the necessary cash to hand, a home improvement personal loan can make good sense. An unsecured personal loan comes with fixed repayment terms and fixed interest rates. This means you may be able to carry out a whole raft of home improvements with just one loan you know you can afford.
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 their advertised ‘representative’ APRs to more than 51% of successful applicants.
The loan deal you are offered will depend on your personal circumstances and credit history, so the APR 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 (say, 28 days worth of interest) if you want to repay a personal loan ahead of the term you agreed at the outset. Check the terms and conditions carefully first.
What about 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 £25,000 – 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. 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 could 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.
Frequently Asked Questions
Can I remortgage for home improvements?
If your current mortgage deal is up for renewal, you could increase the size of your loan in the process of remortgaging to a new lender. This will mean going through new credit and affordability checks but if you unlock a better interest rate in the process, it could be the home improvement borrowing option that makes the most sense.
It also means minimising monthly repayments, as the debt can be spaced out over the remaining term of the mortgage, rather than the maximum five-years more commonly associated with personal loans.
However, a larger mortgage has long-term implications on your mortgage payments, as well as your future borrowing capacity. And if you remortgage halfway through the life of an existing home loan, you may be hit with early repayment charges which would deem it not worthwhile.
Can I use a pre-approved loan for home improvement?
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 upfront information provided, so long as fraud checks are passed and the application details are correct.
Pre-approved offers come with a guaranteed annual percentage rate (APR). This means that the interest rate offer the customer receives for the loan is the rate that they will end up paying.
What is a home equity loan?
A home equity loan is another name for a secured loan, where you borrow against the value of your home. It uses your property as collateral which means your home could be at risk if you are unable to make repayments.
To assess the amount they will lend, secured loan providers compare the current value of your property with the amount of debt already outstanding on it. They will also factor in your debt-to-income ratio (i.e. regular outgoing payments, compared with monthly income) as well as your credit score.
However, you should think very carefully about taking out further debts secured against your home. For the purposes of funding home improvements, it could be best avoided altogether.