Across the UK, high property prices mean that many are putting off purchasing a home to give themselves more time to build up their savings.
Those who are able to complete a purchase often find that the associated costs of buying a home (stamp duty land tax, conveyancing fees and removals) leaves them with very little to put towards home improvements.
But don’t give up! In this article, we’re going to explore some of the financially savvy ways to fund home improvements.
Other than cash, how do people fund home improvements?
After cash savings or borrowing from friends and family, the most popular ways to finance home improvement projects in the UK include:
- Credit cards
- Second charge mortgage / secured loan
- Extending your existing mortgage
- Remortgaging
- Unsecured loan
In principle, these financing methods are available to all homeowners in the UK. It goes without saying, but any decisions relating to using external debt financing should be based on an honest assessment of your ability to afford monthly repayments.
Before committing to any major home improvement projects, take some time to balance your aspirations against your financial situation.
To ensure that your preferred funding method aligns with your overall financial goals, I recommend speaking to an accountancy firm that offers services around personal tax planning. You’ll be surprised at how much you can save by becoming more tax-efficient.
Now, let’s look at some of the most popular ways of raising funds.
1. Credit Cards
If your home improvement project just can’t wait, using a credit card is the first method available to you. Look for lenders offering cards with a low interest rate or, even better, a 0% introductory rate.
Be sure you can keep up with the payments to keep the debt from building. Mismanagement of your credit card spending can lead to extra fees and substantially higher rates of interest.
Credit cards are a good option for smaller home improvement projects or DIY jobs. The major benefit of using a credit card is the protection they give on purchases under the . If you plan on using a contractor or tradesperson, check if they will accept payment via credit card.
From a tax perspective, using a credit card doesn’t offer any tax benefits but responsible use can improve your credit rating.
2. Second Charge Mortgages / Secured Loans
An increasingly popular method among UK homeowners is to take out a second charge mortgage. This type of loan is secured against the equity you already hold in your property, so is sometimes referred to as a ‘secured homeowners loan’.
In terms of cost, as second charge mortgages involve collateral, they generally offer lower interest rates than unsecured loans. However, you’ll pay higher interest rates on a second charge mortgage than you do on your primary/existing mortgage.
3. Extending an Existing Mortgage
Borrowers who are on good terms with their lender and comfortable with the current rates of interest can extend their existing mortgage. Asking the lender to extend an existing mortgage makes sense on mortgage agreements that impose early repayment charges.
Most lenders will only agree to extend mortgages provided that the additional borrowing is secured against the equity you hold in your home. Also, keep in mind that the interest rate on the additional borrowing may differ from the rate on your current mortgage.
4. Remortgaging
Remortgaging involves switching your existing mortgage from one lender to another. Remortgaging is a common strategy for funding home improvements, as it offers a couple of ways to free up funds.
The first way remortgaging can be used to free up funds is by switching to a lender that offers lower interest rates. This allows you to reduce your monthly outgoings and begin putting aside savings. The second way to use remortgaging to gain funds is by using the opportunity to increase the size of your mortgage. The new mortgage could then be used to pay off the old mortgage with the remainder going towards your home improvement budget.
5. Unsecured Loans
Unsecured loans don’t require collateral, but the lender will usually impose higher interest rates. As well as higher interest rates, unsecured loans involve stringent creditworthiness checks. This method is therefore most suitable for individuals with excellent credit ratings, especially as lenders will offer better interest rates to those with better credit ratings.
As mentioned above, terms of unsecured personal loans vary based on the circumstances of the borrower. But opting for a fixed-rate loan allows you to budget and keep on top of your financial planning as you can calculate exactly how much your monthly repayments will be. Keep in mind that, although unsecured personal loans offer more flexibility, the average repayment costs on unsecured loans tend to be higher than mortgage repayment costs.
How to get the most out of your budget
Now that we’ve covered some of the ways you can raise funds for your home improvement project, we need to talk about getting the most out of your budget.
How to prevent costs from spiralling
Whether you’re getting an extension, fitting a new kitchen or getting the bathroom done; one of the best things you can do is to set your budget before speaking to any tradespeople.
Once you’ve decided on a budget, list all of the things you want done including various product options. When you do begin to speak to tradespeople, instead of accepting estimates, ask for written quotes. After receiving written quotes from at least three tradespeople, you’ll know whether or not your budget is realistic.
When deciding on a tradesperson to take on the job, skills and the quote are obviously key factors. But also look for reviews relating to overspends. If your tradesperson asks for an increase on budget once work has begun, ask for a costed work schedule before agreeing to any increases in the budget.
Enjoying your home to the fullest
Thrifty household DIY projects aren’t always feasible. Some jobs require a good chunk of money. But deciding on how to fund home improvements isn’t easy. It involves research and plenty of comparison of various deals.
When you’re assessing your options, remember to compare the total cost of borrowing, not the interest rate alone. The best choice of funding will depend on your circumstances —your financial situation, your credit score, and the scale of the project.
If you can take a measured approach to funding your home improvements, you can transform your living space whilst improving your financial situation.
*A final disclaimer, none of the above is financial advice. Consult a professional accountancy firm to fully understand the options available to you and the financial implications of your preferred method.*
