MORTGAGE FINDER

Guide to Home Improvement Loans

Finding the money for home improvements

Anyone who has carried out a series of wholesale improvements to their house will know that the cost of doing so can often run into many thousands of pounds. There are a variety of ways you can manage the cost. Find out each method's pluses and minuses here.

If you already have got the money to hand to decorate your home then there is no problem. But most of us haven't got nearly enough. So, what options are there? Add the cost to your existing mortgage or take out a Secured loan against your home.

This involves borrowing extra on existing home loan, subject to your lender’s agreement. You then pay the capital and interest off as part of a larger mortgage.

Advantages

• You combine all improvement costs literally as well as actually under one roof
• The payment period runs for exactly the same time as your home loan
• Monthly payments are likely to be lower than with a standard loan or a credit card
• The interest rate on the mortgage will probably be less than what is available elsewhere.

Disadvantages

• While the interest rate is less, you may end up paying more interest, because the period of the mortgage is almost invariably longer than that of a traditional loan
• The amount of interest is likely to vary in line with base rates, so you do not know exactly how much you will pay off. If interest rates rise, so will the payments on your larger mortgage
• Unless you have a mortgage offset account, on which you have already paid back more than the agreed amount, you may have to pay extra fees, plus a valuation report
• The amount you borrow may be subject to whatever multiple of earnings your lender believes you can borrow on the new mortgage
• Your home may be at risk if you are unable to pay off the mortgage

Generally speaking, this type of loan is useful for those who have large-scale home improvements in mind, such as an extension or loft conversion, where the overall costs are likely to run to tens of thousands of pounds.

For smaller improvements, the overall costs – including fees and reports – can make it quite expensive.

Take out a loan

You may go to a bank or another financial institution and take out a loan however it may be best to obtain financial advice from an independent adviser and discuss your options. With Ban and Financial institution loans you agree to pay a set amount, for a fixed period of months until the loan is repaid.

Advantages

• You know exactly how much you are paying at the outset
• It provides welcome discipline to your monthly budgeting
• The loan is paid off sooner than through a mortgage
• Interest rates on many loans are currently at an all-time low and very competitive
• Your home is not at risk if you are unable to pay the loan.

Disadvantages

• Loans are inflexible: you cannot miss a payment, or reduce the amount you pay
• If you redeem the loan early, you may suffer significant redemption penalties
• Interest is still higher than a mortgage – and if you spread the repayment period over, say, 10 years, the amount you pay will be high
• Although your home is not at risk, non-payment can result in County or Sheriff’s Court Judgments against you and you may then find it difficult to credit
• Loans are better for smaller sums of money, where the repayment period is likely to be short. They offer the opportunity to budget, but at the expense of less flexibility.

Credit cards

Here you either use an existing card or apply for a new one and spend up to the agreed limit on your purchases. This can prove very expensive unless you repay the sum borrowed either immediately or very quickly.

Advantages

• They are flexible: you can pay back as little as 5%, in some cases 3% on your card debt each month. This means you can budget accordingly in terms of your other spending
• You can keep spending up to the limit, in effect giving yourself a revolving line of credit
• You only pay interest on the outstanding debt
• If you apply for a 0% interest card, you pay no interest on your purchase(s) for up to 6 months, sometimes longer

Disadvantages

• The interest payments on cards is very high
• The charging structure on all cards is highly complicated and, for some, can be very expensive
• Repaying only the minimum can mean it will take many years to repay the capital owed
• Cards are terrible to budget with unless you are very disciplined and pay back well in excess of your stated minimum
• If you have recurring monthly debt on your card, new purchases are unlikely to enjoy any interest-free credit period.

Credit cards are more useful for purchases, such as furniture or white goods, or even decorating items, than they are for work that is carried out to your house – although some contractors will accept card payments.

Overdrafts

You spend up to the limit previously agreed with your bank.

Advantages

• Some banks’ overdraft rates can be surprisingly low
• You only pay interest on the outstanding debt
• If your wages are paid into your account monthly, you may only be overdrawn for part of that month, and therefore only pay interest for a certain number of days
• Agreed overdrafts can act as a form of "revolving credit", offering the opportunity to go out and spend more, as long as you are under your agreed limit
• They are flexible: you can reduce the overdraft by as much as you wish each month, subject to paying interest on the outstanding amount

Disadvantages

• Some bank overdraft rates can be very high
• If you go over the agreed rate, even inadvertently and for a limited period, the penalties can be extremely high
• Unless you are disciplined, you could find it difficult to pay off the amount you owe the bank
• Overdrafts are typically used for emergencies: by using it to pay for a home improvement, you may find it difficult to access the money if something were to happen

An overdraft, like a credit card, can be useful for making a sudden purchase – at a sale, perhaps.

Unlike a credit card, it is easier to use when you are paying for building work, as you can use a cheque. But it is not ideal for this purpose, being more suited to smaller one-off purchases, thus allowing you to pay the bank back as quickly as possible.

0% finance deals

You are offered these when purchasing some items, usually furniture and carpets, or electrical goods.

You either have an interest-free period for a certain number of months, after which you must pay back the full amount or incur interest charges. Or the deal applies to a fixed repayment period.

Advantages

• You pay no interest on the purchase
• If the deal involves full repayment several months later, you can still set aside money in the interim to do so

Disadvantages

• If you don’t pay the full amount by a certain date, you can end up with heavy interest rate bills
• Sometimes, the item itself is more expensive than might be available elsewhere

Deals like this are useful if you want the individual item on sale. But you have to be careful of not being caught out, particularly with “deferred” interest deals.

Store cards

Are similar to credit cards: these usually allow you a certain credit limit in one store chain, or several owned by one larger corporation.

Advantages

• Discounts are sometimes offered to first-time applicants for a store card. This can be useful if you are looking to make an expensive purchase

Disadvantages

• Grotesquely high interest rates charged on store cards make them uneconomical to use

In most cases, store cards are a no-no for canny home improvers. The exception is if you are offered a one-off discount on application - in which case you should cover the amount borrowed on the store card by another form of credit before the interest—free period ends.

Please note that this information does not constitute regulated financial advice, which recommends a course of action based upon the specifics of your personal circumstances. The information is purely intended to provide you with general information only. You should consult an Independent Financial/Mortgage Adviser (IFA) before making any important decisions about your finances.

Please therefore just contact us either by phone on ~ 0845 642 0644 (Local Rate), use the quick Mortgage Finder ~ CALL BACK FORM or use the brief Mortgage Finder ~ ENQUIRY FORM, and then simply allow us to assist you with further information without any obligation whatsoever.

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Read more informatioms, click the links below

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