Guide

guide to loans for extensions

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Written by Publishing Team

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  • Have you noticed parts of your home that need a renovation? Or maybe you just imagined how better life would be with a bigger kitchen or an extra bathroom. It can be hard to “remove” these update ideas! If you had decided to go through a renovation, how would you fund it? Has the topic of home improvement loans come to mind?

    The good news is that renovating your current home is likely to be more cost-effective than moving. However, home renovations such as a loft conversion or kitchen accessories come at a price that may require you to borrow. “It is important that any improvements are made correctly and professionally,” says Michael Holden, Chartered Surveyor. “When an investment is made in a property, it emerges and will pay off through added value and sellability.”

    Home Improvement Loans Explained

    How much you can borrow depends in part on what you want to do and the current state of your money. Whether you need kitchen financing or a loan for an extension, rest assured that you can pay it off.

    “Affordability is the most important thing to consider,” says Richard Jones, director of business development for price comparison website Go Compare*. “There are plenty of online tools and calculators that let you know your eligibility before you apply for funding.”

    House with teal painted front door and exterior gate

    Image credit: Furture Plc

    Once you have an amount in mind, it’s time to shop for the best deal on this borrowing. Pay too much for credit and you’re wasting money that could have been spent on finishing touches to upgrade your home.

    Home Improvement Loans – What are the Options?

    1. Personal Loans – Unsecured

    Personal home improvement loans are not secured against your property or any assets. Therefore, if you default, the lender cannot come after your property. However, you will need a good credit rating to secure the best deals. “A personal loan can be a good option if you are looking to borrow between £500 and £25,000,” says Richard Jones of Go Compare. “It can be set up so you know what you’ll be paying each month as well.”

    Repayment installments are usually set over one to five years. A long-term loan may sound attractive, as the monthly payments will be lower, but you will end up paying more total at the end of the loan than a short-term loan, because you will be paying interest for a longer period.

    Personal loans are more suitable for small projects such as a new bathroom, kitchen renovation or window replacement, rather than an extension or conversion of a loft (which often cost more than £25,000).

    Compare interest rates

    The interest rate you will pay will depend on your circumstances, the amount you want to borrow and the term. Costs vary widely between lenders, with some loans priced at more than twice the interest rate of others, according to Go Compare. The best deals go to the people who are considered the best risk, so check your credit profile for free at agencies like Clearscore.com and Experian.co.uk to see where you stand.

    “It’s worth improving your credit score up front before borrowing money,” Jones adds. “Make sure you are on the electoral register and pay utility bills and other expenses on time.” Likewise, avoid too many requests for credit, which can negatively affect your score. The comparison site will let you do a simple research to see how much you can borrow and what your repayments might be before applying, which won’t affect your credit score.

    It is worth doing the work. A cheaper interest rate could be the key to securing that rolled bathroom or living room flooring you’ve been dreaming of.

    Pros and Cons of a Personal Loan

    Positives: Less risk than a secured loan (but not completely risk free if you default). If you qualify, you can borrow up to £25,000 and sometimes more. You can borrow a fixed amount in fixed installments every month.

    Negatives: The maximum amount you can borrow is generally £25,000, so this option will not be suitable for larger projects. Some finance companies may charge additional fees if you want to pay overpayment or pay early.

    Modern entrance with oak front door and tiled floor

    Image credit: Future Plc

    2. Secured Home Improvement Loans – Against Your Home

    Those who have equity in their homes can usually borrow larger amounts for longer periods with a secured loan. The crucial point to understand is that this borrowing is secured against your home. Not paying for these types of home improvements will put your home at risk.

    This type of borrowing is often used to make major home improvements that require project planning and can usually be arranged through your existing mortgage lender. This loan may be referred to as another advance.

    Shop around

    Do not exclude other lenders. It’s worth taking the time to find out what rates others are offering on more mortgage advances or re-mortgages. After all, it’s better to cash in on your rollover, rather than unnecessary interest charges.

    How much you can borrow depends on how you intend to spend it, how much equity in your home is and what your other expenses are.

    “An extra advance on your mortgage may be an option if you have enough equity in your property,” says Paul Archer, senior mortgage manager at the Nationwide Building Society. This type of borrowing is often used to finance projects that will add value to your property, such as an extension or loft conversion, where you spread the cost over the remaining term of the mortgage.

    Pros and Cons of a Secured Loan

    Positives: Equity homeowners can borrow larger amounts than the unsecured loan (up to 85% of your home’s value with some lenders). The amount is spread over a longer period of the personal loan – up to the remaining term of your mortgage, or even longer with a different lender.

    Negatives: Your home is at risk of repossession if you can’t make your home improvement loan payments. The monthly payments may appear lower than the payments with a personal loan because they are over a longer term, but you will end up paying more at the end of the loan.

    Archer adds: ‘Monthly installments tend to be lower than personal loans. However, you may end up paying more at the end of the term than a personal loan, since you are paying for a longer period. Also, keep in mind that lenders often only offer up to 85% of your home’s value, so if you’re already highly leveraged, this may not be an option.

    Kitchen island with built-in refrigerators and bar stools at the breakfast bar

    Image credit: Future PLC / Polly Eltes

    3. Home Improvement Loan Alternatives

    Home improvement loans aren’t the only way to finance a new kitchen or bathroom. Depending on the size of your project, re-mortgage, agreed credit and overdraft cards can be other ways of financing.

    • Credit Cards Deals that come with interest-free credit are worth exploring. According to Martin Lewis of moneysavingexpert.com, if done right, 0% credit cards are the cheapest way to borrow money.
    • Look for 0% offers – you can usually go zero interest for a short period (usually up to 23 months) on a set amount (often under £3,000). Deals vary and assume you have a really good credit rating. However, it is important to ensure that you can pay off the balance in full during the introductory period to avoid paying interest when the 0% interest period expires, as rates will then rise.

    “If you only need to borrow a small amount within a short period or you want more flexibility in repayment, you can look to business financing with a credit card,” says James Broome of the Nationwide Building Society. “Many credit cards offer an introductory 0% offer but you should always look to pay off during the introductory period, as once that is over, you will pay a much higher level of interest than you would on a personal loan.”

    Credit Card Pros and Cons

    Positives: If you choose a card with 0% interest and meet all requirements and repayment installments within the agreed term, it is a free borrowing. You can choose how much to repay each month, taking into account the minimum repayment, which makes credit cards more flexible than loans.

    Negatives: Cards with 0% interest are only useful for a small amount of borrowing (usually up to £3,000) that is paid off in a short period of time (generally less than 23 months). So it is not suitable for larger home improvement projects. You may be required to spend the credit in a short time frame (often 60 days). Payment penalties will be high if you do not make your payments. Self-discipline is required to not use the card after the 0% interest offer expires and the high interest rates start.

    Kitchen Extension

    Image credit: Future PLC / Alistair Nicholls

    4. Reclassification

    This usually happens when you convert your mortgage into a new deal. Or, if you have reached the end of your fixed mortgage term or you are on a standard variable rate. This is the time to find a mortgage at a lower rate than you would have paid and to borrow more.

    If you are tied to a high interest rate, it may be possible to borrow more, while keeping your repayments the same. Although you have to keep in mind that there is usually an arrangement fee with a new mortgage.

    “If you’re looking to refinance to fund home improvements, it’s worth looking into your place in any existing mortgage deal,” says Paul Archer. If you are done with this, the early repayment fee may become payable if you wish to leave. An extra advance may be a better option as you can get it as a separate loan for your mortgage.

    Rearrange the pros and cons

    Positives: You can spread out the payments for a longer period, along with your mortgage if you so choose. If you reach the end of your mortgage deal, this is an opportunity to borrow more at a better rate. Monthly payments may be lower than other forms of borrowing.

    Negatives: Your home is at risk if you cannot make the payments. Although the monthly payments seem less than a personal loan, you are paying them for a longer period. Therefore, you will pay more interest over the entire term. There may be an early payment fee for letting go of your existing mortgage and an arrangement fee for setting up a new one.

    loft-conversion-ideas-area

    Image credit: Future PLC/David Giles

    6. Home Improvement Overdraft

    It may be possible to arrange an authorized overdraft from your checking account. Your bank or building society will agree to a certain fee in advance. This is different from unauthorized overdrafts, which happen when you go “into the red” on your checking account and expensive fees are applied.

    An overdraft will create an amount of cash that can be useful for financing home improvements. But these facilities are designed as a short term way to borrow money if you need it quickly. The general consensus is that it is best not to use overdrafts to borrow money because the fees are high. “We advise avoiding overdrafts to fund home improvements at all costs,” says Richard Jones. Banks have recently been forced to change their fee structures, so this is an expensive way to borrow money

    “Using overdrafts for major home improvements is never recommended,” says James Broome of the Nationwide Building Society. “Doing so is likely to cost you a lot more than other forms of credit.”

    Pros and cons of overdraft

    Positives: A short term option in an emergency.

    Negatives: Overdraft fees are high and the amounts available for the loan are lower than other forms of borrowing. It is not recommended as a way to finance home improvements.

    Home improvement loans can seem daunting. However, if home improvements are done well, you may pay for them when it comes to selling.

    *Ideal Home and Go Compare is part of Future plc.

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