A home improvement loan can go a long way to making your home better suited to your needs, as well as adding thousands (tens of thousands in some cases) to the value of your home. Even the simplest of home improvements can be costly, to say nothing of major renovation and extension projects.
A home improvement loan can be a convenient way to fund your project, especially when you don't want to wait years to save up for it, but, as with all other types of loans, it's not without risk. We explain the different types of loans available and their pros and cons.
First-time buyer? Always find the best mortgage deal before you take out any other loan. Online mortgage experts Habito have a handy online comparison tool; use it to work out how much you could borrow.
What is a home improvement loan?
A home imporvement loan is, quite simply, any personal loan taken out with the purpose of spending it on a home improvement project. It doesn't actually exist as a separate category of borrowing, but when you apply for a personal loan with your chosen lender (usually your bank), they will want to know what the loan is for, which is where your home improvement project comes in. The most important distinction to understand is between secured and unsecured personal loans; read about them below.
Unsecured home improvement loans
An unsecured personal loan is by far the most common way of funding a home improvement project; it's typically a fixed-term, fixed-rate loan with monthly repayments. The bank might offer you a loan of anywhere between £5,000 and £15,000, repayable over three, five, or 10 years.
To get the best possible rate, always go for the shorter repayment period. Also, beware of cheap APR rates advertised by lenders: legally, they only have to offer those rates to 51 per cent of successful applicants; in reality, depending on your financial situation and credit score, you may well be offered a higher rate.
Secured home improvement loans
A secured home improvement loan will usually involve larger sums than an unsecured personal loan, and it will be secured against your property. In reality, taking out such a loan is much like taking on a second mortgage; if you default on your repayments, your home may be repossessed. Also, like most mortgages, secured personal loans have variable rates, which means that if interest rates were to go up, you would end up with higher monthly repayment both on your loan and your mortgage.
This loan is more suitable for higher earners undertaking a vast renovation project, or a very expensive extension and remodel that will add enough value to the property to make the loan worth it.
How to apply for a home improvement loan
The application process is quicker and simpler for an unsecured loan, and is similar to a credit card application with your bank. A secured loan application will take longer and be more rigorous, although it's worth noting that whether you are asking your bank for £5,000 or £50,000, they will always check your credit rating before lending.
Home improvement loans: the pros
Every loan is a form of debt and involves financial risk, but it can be well worth it in the case of home improvements. Here's why:
- You could add a lot of value to your home, quickly: a well executed, considered home improvement could add tens of thousands in value to your home, which, compounded with house price growth over time, could make you a tidy profit when you sell;
- It could save you moving costs: a home improvement loan can make the difference between having to move and making your home more suitable to your changing needs, for example by adding an extension as your family grows.
Home improvement loans: the cons
- If house prices were to drop dramatically, you could end up making a loss, with the added value from the improvement cancelled out by the depreciated home value;
- If you take out a large secured loan and fail to make the repayments, your home could be repossessed;
- Some loans come with conditions you may find tricky, such as not being able to let out your home while you're repaying the loan, or being penalised for repaying early.
Alternative ways to fund a home improvement project
If you're not keen on the idea of taking out a personal loan, you could try to fund your home improvement in a different way. One option is to take out a 0 per cent interest credit card, which will allow you to spread out the cost of a smaller project (a bathroom remodel, say). If you take this option, you'll need to be disciplined and not use the card for other expenses, as you could end up racking up too much debt.
The other option is to remortgage your home, freeing up cash for your home improvement project by switching to a better deal.
How much should I borrow for home improvement?
If you are applying for an unsecured loan, the sweet spot for the lowest interest rates seems to be between £8,000 and £15,000. If your planned home improvement will cost less than £8,000, it might be worth investigating a credit card instead.
At the same time, there's no point applying for a loan secured against your property if you're only planning a project worth £20,000; for the trouble of applying and the risks involved, only do it if you're doing a substantial remodel/extension of £50,000 and up. For mid-sized projects of between £20,000 and £50,000, you might want to consider holding off until it's time to remortgage.
We have teamed up with online mortgage experts Habito to help you find the best deals on mortgages: they offer the full service, from the online comparison tool (which you can use below), to looking over your documents, helping you find the best deal and even assisting with paperwork.