Home Improvement Loans
Home renovations can be an expensive and time-consuming venture to undertake, as anybody who’s carried one out will know.
However, they can also add heaps of value to your property whilst making your living space extra comfortable and more suited to your taste.
If your home is in desperate need of a facelift, you might be thinking about planning some home renovations like an extension, bathroom remodel, or kitchen upgrade.
However, a lot of people don’t have the cash to pay for big improvement projects like this up front.
This is where home improvement loans can come to the rescue.
In this article, we'll explore what home improvement loans are, how they work, and the different types of loans which you could take out to create your dream home.
What is a home improvement loan?
A home improvement loan usually comes in the form of a personal loan in most cases.
They are flexible products which you can spend at your discretion.
You will be able to use the funds you borrow from a lender to carry out any much-needed renovations or building work to revamp your house.
Many people take out a home improvement loan to complete work which will hopefully increase the value of their property, whilst others get a home improvement loan to create more space, additional rooms, or give their current fixtures a makeover.
In a lot of cases, this can be a solid alternative to selling your home, especially if you’ve recently bought it, or don’t wish to go through the hassle of transferring your mortgage in a bid to move elsewhere.
Which type of loan is best for home improvements?
As is the case with all personal finance products, there isn’t a universally applicable answer to this question.
The most useful type of loan for home improvements will depend on the state of your current finances, the scope of the project you intend to carry out, and other factors related to your history of credit use.
With that being said, there are a few different types of loan which are popular among customers looking to make improvements to their property.
Personal loans
Advantages
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These loans allow you to borrow small amounts, sometimes as little as a thousand pounds or two. If you’re looking to do a minor home improvement project, a personal loan could help you avoid overburdening yourself with unnecessary debt.
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Depending on which lender you use, you might be allowed to start making repayments after the first few months into the loan term, rather than needing to make them straight away. This gives you a buffer to adjust to your new budget.
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As personal loans are usually unsecured, it’s unlikely you’ll be expected to use your home as collateral.
What to Consider
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You’ll need a tip top credit score to get approved for the best deals, which is difficult if you have adverse credit history.
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If you want to borrow enough to build an extension, or totally transform your kitchen, a personal loan may not enable you to borrow a large enough sum to do so.
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Even if you only take out a small personal loan, the interest rates may be higher than you’d expect.
Secured loans
Advantages
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Depending on your individual circumstances, you might be afforded longer to complete your repayments than you would with other loan types.
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You can usually borrow large amounts with a secured loan. Occasionally, customers are able to borrow up to around £100,000. If you’ve got some major renovations in mind, this could be a great route to go down.
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Do you have a less than perfect credit score? You may have more of a chance in getting approved for a secured loan than an unsecured personal loan as lenders would need to take less of a risk on you.
What to Consider
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If you don’t manage to meet your repayment obligations, you are at risk of forfeiting your home if you’ve used it as collateral.
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If your only valuable asset is your house, the amount you will be allowed to borrow could be limited by your property’s value and how much equity you personally have tied up in it.
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In most cases, you won’t be able to borrow any less than £5,000. If you overestimate how much your project will cost, you’re going to need to keep to the scheduled payments to avoid early repayment tariffs. This means you may be in debt for longer than necessary.
Guarantor loans
Advantages
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If your credit record leaves something to be desired, a guarantor could help you get approved for a loan which you may not be able to obtain on your own.
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You don’t need to put your home up as security for the loan, which can be a relief.
What to Consider
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The clue is in the name… you must be able to find an appropriate guarantor by yourself.
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Depending on a variety of factors, you may not be able to borrow huge amounts with a guarantor loan.
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Your guarantor is legally obliged to cover your debt on your behalf if you can’t keep up with repayments. This could land the relationship with your guarantor on rocky water.
Can I add a home improvement loan to my mortgage?
Whilst many people prefer to borrow an entirely separate sum of cash to finance home renovations, some prefer to add the sum of a home improvement loan to their mortgage.
For example, instead of going to a bank or online lender and requesting a personal loan, you may be able to ask your existing mortgage provider to re-mortgage the house itself.
If the lender agrees, they will be able to offer you a cash sum which you can use to cover the outgoings for your home renovation, and you will pay off the loan they give you alongside your mortgage payments in one single instalment each month.
This process can be much easier to manage than the alternative, which is making multiple loan payments per month.
Whilst this is a generally accepted practice, the lender’s decision will hinge on how strong your ability to repay the loan is based on their criteria.
Just because they’ve already given you a mortgage, it doesn’t automatically mean you’re a shoo-in for a further loan.
When coming to a decision on whether to add a home improvement loan to your mortgage, the lender will consider any other debts you have against your income.
So, if you’re already financially stretched by your mortgage, it might be wise to consider any other options which are at your disposal.
It's also worth bearing in mind that, depending on the top up loan amount you request, adding a home improvement loan to your pre-existing mortgage is likely to increase your monthly mortgage payments, or perhaps even extend the length of your mortgage quite considerably in the long term.
Finally, it’s important to consider the fact that adding a loan to your mortgage isn’t always the most cost-effective route to take when planning a home renovation.
This is because the total interest you'll end up paying over the full term of your mortgage will increase as the mortgage term extends, and the loan amount grows.
In a lot of cases, it might be worth exploring other loan options which are on the market or trying to save up the funds yourself for your home renovation project.
As is the case with any major financial decision, it's vital to carry out your own research, compare the loan options available from each lender, and consult with a mortgage expert before coming to a final decision.
Can I get a home improvement loan with bad credit?
Unfortunately, if you have a poor credit record, getting a loan can be a taxing challenge.
If lenders identify you as a risky borrower, they may require a higher interest rate to be paid on any cash that they lend you, or even expect you to comply with stricter loan terms.
In light of this, it may be more difficult to get a home improvement loan with good rates if you’re stuck with a low credit score and some irresponsible financial behaviour is recorded on your credit file.
With this being said, it is not an impossible task to obtain a loan with a bad credit history looming over you.
There are still a plethora of options available for those with poor credit who need a home improvement loan to fulfil their objectives for a project.
Some lenders even specialise in offering loans to borrowers with poor credit, although these loans are likely to come with higher charges than usual.
Additionally, you may be able to improve your chances of getting approved for a loan by applying for a secured product which uses any valuable assets, such as your home or car, as collateral to secure the loan.
If you’re somebody who has bad credit and are considering applying for a home improvement loan, it's important to do your research, compare lenders so you’re able to secure the best rate available to you, and take steps to improve your credit score over time.
This might include things like paying down debt you already have, making all payments on time according to a schedule, and proactively disputing any errors you might find on your credit report.
Are there any further alternatives to a home improvement loan?
If you’re in the market for some renovation work and are looking to borrow a relatively small amount of money to complete the job, you could consider getting your hands on a 0% interest credit card.
Some banks and credit unions offer cards which afford customers a credit limit which carries a 0% interest rate for a set period. Depending on which lender you go with, this can last between 3-20 months, or longer.
Providing you pay off the balance you use in full before this promotional period comes to an end, you won’t be expected to pay any interest at all. What a bonus!
However, it’s important to be aware that if you have an outstanding balance on the card when the period culminates, you’ll automatically be placed on the lender’s standard rate of interest charges.
This can end up being an expensive mistake if you don’t clarify the terms of the card before you take one out.
All in all, if you’re confident in your ability to repay your debt on the card within the outlined period, a 0% interest credit card could be your best option. On the other hand, if you’d prefer a fixed, upfront plan of repayments, then you’re probably better suited to taking out a loan.