How to fund a contingency budget

When you take on any building project, variables can crop up, making it crucial to have a contingency fund. Plan ahead to prepare for any possible problems as it will be cheaper in the long run, says Jennifer Newton.

Plan ahead to prepare for any possible problems as it will be cheaper in the long run, says Jennifer Newton.

When you take on any building project, variables can crop up, making it crucial to have a contingency fund. For example, if you’re installing a bathroom you’ll be quoted on replacing the existing one, but once work starts you might find you need to replace rotten floorboards damaged by previous leaks.

Property guru Kate Faulkner advises in the Which? Essential Guide Develop A Property: A Complete Guide to Planning, Managing and Funding Home Improvements that a contingency sum is essential. Here’s what to allow as a contingency fund from the price quoted for work:

  • Large jobs: 20 per cent of the budget – for example, if you’ve been quoted £50,000 for a new kitchen extension, it would be wise to allow an extra 20 per cent (£10,000) to cover the unforeseen.
  • Small jobs: 10-15 per cent of the budget.
  • Jobs on period properties: 30 per cent of the budget.

Leaks in the roof are just one of the thouands of reasons a contingency budget can come in handy

Your three options

Mortgages

An offset mortgage is perfect as it will be linked to your savings account – if you don’t use the extra funds you won’t be charged interest on the extra.

All mortgages, from fixed to tracker, offer the cheapest interest rate. What you must also consider is if you have enough equity (see below) in your home – you need at least 25 per cent.

Remortgaging to a new low long-term fixed rate is another option as rates have plummeted. For example, Nationwide (nationwide.co.uk) is offering 3.89% for five years for those with 30 per cent equity – monthly repayments on a 25-year £150,000 mortgage work out at £783.

Personal loans

But shop around. Santander (santander.co.uk) is offering 6.6% for loans up to £15,000 – if you borrowed £10,000 over five years you would repay £195.23 per month. For personal loans up to £25,000 the rate is only slightly more at 8.3% from Sainsbury’s Finance.

Credit cards

All offers and rates correct at time of publishing