There are many ways to finance home improvement projects, but what's best for you?
There are a variety of ways you could fund property refurbishments. The best way to fund your home improvements will depend on your personal circumstances and the cost of refurbishments you want to make on your property. In the kitchen, bedroom and bathroom business, the project cost can be substantial, where a full kitchen refurbishment will rarely cost less than £10,000, and in the upper market segment you can add another zero. Bathroom costs can start from around £5,000 for a full refurbishment and again in the upper market could easily pass the £75,000 mark. Costs for a bedroom refurbishment can be less because there is less plumbing and electrical work, but can still easily extend into five figures.
It is not possible to provide a meaningful "average" cost as product prices vary so much, and this means that you really need to work out your own budget. Consider the cost of the products, the cost of other materials required for installation and the cost of labour. This can then be set against what you feel is comfortably affordable and a balanced budget worked out.
Lets have a look at the main methods of funding a refurbishment.
Cash.
Using your savings: If you have the means, using your savings to fund your home improvements could cost you less overall because it won’t have interest rates or arrangement fees. In some cases, it may also present less of a financial burden, as you won’t be taking on additional debt.
A loan from a family member may offer a "cash" option too, and is likely to be interest free, but be careful mixing family and finance. I can have unintended consequences.
It's a personal choice, entirely up to yourself if you have the cash available, and to be completely honest, with returns on investments and deposit interest rates being low there's probably not much to loose by spending your cash, and of course you will avoid incurring interest payments on anything you would borrow.
So if you happen to have the cash available then the choice is yours.
Mortgage.
Remortgaging can allow you to release equity from your current mortgage by taking out a new mortgage on your property. This has the potential for lower interest rates and can allow you access to a lump sum of funds that can be used flexibly. It is important to note that upfront fees and costs are involved, and extending the loan term may increase the total repayment amount. If you’re using a new lender, existing mortgage penalties and creditworthiness assessments by the new lender should also be considered.
Second mortgages allow homeowners to borrow against the equity in their property while retaining their existing mortgage. The loan amount is usually based on the available equity in the property. Second mortgages generally come with higher interest rates compared to primary mortgages. As well as this, taking on a second mortgage means adding another loan repayment to your financial obligations.
Equity Release (for over 55s) schemes are specifically designed for individuals aged 55 and older who own their homes. These schemes provide a way to access the equity tied up in their property without selling it. Like remortgaging, this finance solution allows homeowners access to a flexible sum of money. Some equity release schemes, like lifetime mortgages, typically do not require monthly repayments. The loan, including accrued interest, is repaid when the homeowner passes away or moves into long-term care.
Personal Loan.
Personal loans are unsecured loans that allow individuals to borrow from a lender for various purposes, and are popular for home improvements. Interest rates will depend on your personal circumstances and credit profile, as will the amount available for you to borrow.
A home improvement loan may not be the best option for older borrowers because this will cause them to incur a debt that requires servicing in retirement. Think carefully about how long you will need to repay the loan if you are considering this method.
Lenders will usually consider your credit score when applying for a personal loan, and you may still be able to take out a personal loan with adverse credit, you may be subject to significantly higher interest rates.
Secured loans are offered by may lenders and are similar to a second mortgage. They will involve the lender taking a charge over your property leaving your home at risk if you fail to keep up repayments, and will also have additional set up fees at the start. if your credit score is less than good a secured loan might be an option available to you.
Credit Card.
A credit card can provide a convenient and flexible way to fund, or even part fund, your project. With larger cost projects the amounts available on most credit cards would not be sufficient to fund the total but in cases where you’re funding most of the refurbishments with your own resources, or only making light refurbishments, this smaller borrowing amount can allow you the financial flexibility you need during your project. But remember, when credit card debt isn’t paid off in a timely manner, it can result in high interest rates and is likely to affect your credit score.
Dealer Finance.
Many retail outlets will offer finance facilities for their customers. These will usually take the form of a personal loan (as above) but all the arrangements and paperwork can be completed at the retailer's premises. Many lenders now offer the option of making a "soft search" of your credit profile to assess your eligibility before making the full application which will not impact your credit score and allows you to avoid a mark on your credit record if your are unlikely to be accepted.
Some dealers will promote a 0% finance option, ie interest free, which is very attractive, and will not be available to individuals applying directly to the lender. These schemes are generally worth consideration, although sometimes they will not be available on sale prices and special offers.
Remember that it is always a possibility to combine two or more of these funding methods to achieve your goal. Do your sums carefully and look at the total cost at the end of the term, not the interest rates. APR and AER are tricky concepts to grapple with, but multiply the monthly payment by the number of months and you have a clear figure. Don't forget to add in any cash contributions or funding from other sources to see the overall cost. Then you can compare different lenders and options.
When committing to a loan agreement, just be sure you can be comfortable with the repayments, and consider how you would cope if your circumstances changed, ie your job or illness.
