Buying and moving into a new home is considered one of the most exciting landmarks in anybody’s life. Unfortunately, the financial responsibilities of home ownership continue long after a mortgage has been agreed upon. When a property requires modernisation and repair, a home improvement loan can make this work possible.
What we cover in this article:
- What is a home improvement loan?
- Is a home improvement loan a good idea?
- How much can I borrow with a home improvement loan?
- What are the different types of home improvement loan?
- What work can be undertaken using a home improvement loan?
- What are the key considerations when choosing a home improvement loan?
- What are the alternatives to a home improvement loan?
- Can I get a home improvement loan with bad credit?
- How much does a home improvement loan cost?
- Is a home improvement loan the same as a home equity loan?
What is a home improvement loan?
A home improvement loan involves borrowing money from a professional lender to take care of work around your property. Home improvements come in many forms, from the aesthetic, such as painting and decorating, to the structural, which could include repairing ageing or damaged windows and doors, modernising dated and dangerous electrical wiring, or extending your property.
A home improvement loan can act as an upfront payment for your renovation work. This allows you to make payments to contractors to undertake the work without having to save up money beforehand.
Is a home improvement loan a good idea?
Yes, a home improvement loan is a good idea if you’re looking to make improvements to your property but don’t have the cash. That said, do not rush into the decision to take out a home improvement loan. If you do so, you’ll be tying yourself to a credit agreement for a prolonged period. There are advantages to taking out such an agreement, though, including:
- With a loan, you can arrange for all work to take place at once, rather than hiring multiple tradespeople to complete jobs piecemeal.
- Rapid improvements ensure that issues and damage within your property will not deteriorate further, potentially saving money in the longer-term.
- Making improvements to your home will likely increase its value, enhancing your investment.
- Your home will be considerably more enjoyable to live in after making suitable enhancements and improvements, which will increase your quality of life.
- A homeowner loan is likely to be a little more cost-effective than maxing out your credit cards to pay for necessary improvements.
This does not mean there are no drawbacks to taking out a home improvement loan. Things to be mindful of include:
- When multiple years of interest repayments are taken into consideration, you will pay more than the initial loan amount for the work.
- If the tradespeople you hire do a substandard job, you will not be able to negotiate your loan repayments to reflect this.
Overall, however, a home improvement loan can be a great way to increase the quality and liveability of your property. As long as you spend the money strategically, you can reap the benefits for many years.
How much can I borrow with a home improvement loan?
You can borrow a maximum of 95% of your property value, minus your outstanding mortgage. Secured home improvement loans are based on your income, credit history and the amount of equity in your property.
Many variables are at play when assessing how much you can borrow as part of a home improvement loan. Unsecured loans usually have a smaller maximum loan than secured counterparts, and your unique credit rating will factor into your opportunity to borrow.
What are the different types of home improvement loan?
There are two main types of home improvement loans; unsecured and secured. Unsecured loans are not linked to your property or any other asset. This means that if you fail to make the repayments, you will not be at risk of your home being repossessed.
Of course, less risk for the borrower means more risk for the lender. This means that if you’re looking for a loan large enough to finance a major purchase such as an extension or renovation, you’ll likely need to take out a secured loan. You’ll also pay a much higher interest rate for unsecured borrowing than secured.
As the name suggests, a secured loan is obtained by using an asset as collateral. In the case of a home improvement loan, this will be the property itself. If you fail to keep up with the repayments attached to your loan, you risk your home being repossessed.
On the plus side, secured loans typically have a lower interest rate compared to their unsecured counterparts.
Also, consider the difference between fixed and variable interest rates on your home improvement loan. A fixed rate will remain the same throughout the agreed fixed rate period. You will always know how much you will need to repay on your loan, from the day you take out the agreement to the moment your fixed rate ends.
A variable interest rate will be periodically assessed and may rise or fall depending on the lenders variable rate, or the Bank of England Base Rate. This means that you’ll be at the mercy of rate changes – you may get a better, cheaper deal than a fixed rate, but you could end up paying much more. Only take on a variable rate loan if you are confident that you can afford increased payments if the interest rate substantially increases.
What work can be undertaken using a home improvement loan?
Home improvement loans can be used to fund the following:
- Replacing or repairing significant structural damage, such as a leaking roof.
- Modernising and rewiring an outdated and dangerous electricity.
- Installing a new boiler or water tank.
- Rendering interior and/or exterior walls to maximise heating efficiency.
- Refurbishment and redesign of a kitchen or bathroom.
- Converting a loft or garage into a bedroom or living space.
- Extending your home through the addition of a conservatory or additional storey.
If you take out an unsecured loan and decide to use it to hire a professional painter and decorator, or another aesthetic service, you will be free to do so. If a lender questions what you plan to use the loan for, they may decline to issue significant funds to cover such works.
What are the key considerations when choosing a home improvement loan?
Before committing to a home improvement loan, ask yourself the following questions.
- Are the improvements you are looking to make strictly necessary and need to be completed ASAP?
- Have you investigated alternatives to these improvements that may not cost as much?
- Would it be too difficult for you to make the improvements yourself, making it essential that you bring in professional assistance?
- Will the improvements you are looking to make increase the value of your home?
- Have you sourced a reputable tradesperson to complete the work, obtaining a formal quote that is considered fair and reasonable by industry standards?
- Can you realistically keep up with the repayments of your home improvement loan without potentially plunging yourself into financial hardship?
If you answered yes to all of these questions, you are in a strong position to apply for a home improvement loan. Consider an alternative approach if you have reservations about any of these queries.
What are the alternatives to a home improvement loan?
A loan may seem like the most practical solution if you need to make home improvements but do not have access to savings. It is not your only option, though. You could also take the following approaches under advisement.
0% credit cards
It’s not advisable to rack up credit card debt to pay for home improvements – the interest will likely be unfavourable compared to a loan. If you can take out a new credit card (or more than one!) with 0% interest, this could get the work done without paying any interest.
You’ll need a repayment strategy to clear any new credit card debt in short order for this approach to work out. 0% credit card deals invariably have a shelf life, typically three or six months. If you do not repay them by this time, you’ll start paying additional interest that will likely be far higher than a home improvement loan.
If you are on a low income, you may not need a home improvement loan – government grants may be available to help finance essential home improvements. Discuss your potential access to these grants with your local citizen’s advice bureau.
Can I get a home improvement loan with bad credit?
Yes, you can still get a home improvement loan with bad credit. When it comes to unsecured loans, high street lenders, in particular, operate blanket bans on certain kinds of bad credit, most notably CCJs, IVAs and bankruptcy.
You’re likelier to be accepted for a secured home improvement loan with bad credit if you apply through an experienced broker.
Our secured home improvement loans can be taken by borrowers who have the following:
- Previous bankruptcy
- Previous mortgage arrears
If you’re unsure if you’ll qualify, our team of experts will talk through your options for free during an initial phone call.
How much does a home improvement loan cost?
The total cost of a home improvement loan will be the amount borrowed, plus any interest you have accrue over the repayment term. This means the total cost will vary depending on your interest rate and loan term.
Let’s imagine you borrow £10,000 for home improvements, which will be repaid over six years at an interest rate of 3.7%. You’ll get a pretty good deal if you never fall behind on your repayments. The total repayable sum will be around £11,000, so you are only paying £1,000 in fees. The improvements you’ll make to your home will likely pay for this outstrip this several times over.
Alas, not everybody will be eligible for such a favourable interest rate, and repaying the loan over a longer time will also increase the amount you need to pay. Factor this into your decision about taking out a home improvement loan. The higher the interest rate, the more you will pay overall.
Is a home improvement loan the same as a home equity loan?
Yes, a home improvement loan and a home equity loan can be the same thing. Secured home improvement loans are a type of home equity, or secured loan. Unsecured home improvement loans are a type of personal loan.