Moving home is not an ideal option every time because of high prices and stamp duty. This is why people decide to stay in the same house. However, they prefer doing them up to increase the value. Home renovation is not a cheap option, and most of you do not stash away money for it. Further, how much it will cost depends on the level of refurbishment. Whether you want to create a patio or you want to add a whole wing to your house, the first step is to see whether it is worth doing or not.
Before you decide the funding option for home restoration, it is essential to find out whether it makes a financial sense. Many people improve their homes to increase their income. For instance, you have rented out a bedroom and a bath for £700. You want to add a kitchen to it to earn £1,500, but is the extra monthly income worth spending around £25,000?
Once you have taken the initiative, you cannot take back a step. The rule of thumb says that you should analyse the pros and cons before investing in the project. Once you have decided that you are about to get it off the ground, the following are the funding options you can consider.
Take out a remortgage
People often get bewildered about taking out a remortgage or a home improvement loan. The option you will choose depends on your financial circumstances. Home improvement loans are available at competitive prices. This may not be an ideal option if you are soon going to be retired. Consider the interest rates and the length of the loan.
However, if your home has equity, you should take out a remortgage. It can be an affordable way for home refurbishment. You can borrow a large amount of money at lower interest rates. However, the lender will run a credit check to see if you can afford the loan. Refinancing your existing mortgage will require you to pay additional fees, including an earlier payment penalty.
- Remortgaging is an ideal option when you get a lower interest-rate deal than you pay currently.
- You can still save some money by paying a prepayment penalty.
If your home does not have equity or you are not able to get lower interest rates, you should not refinance your existing mortgage. In this situation, getting a personal loan will be an ideal option. Personal loans are unsecured loans. Whether you want to hire a contractor or do it yourself, personal loans can manage to fund your needs even though you have put aside money.
You can apply for personal loans through banks and direct lenders. However, the former will not entertain your applications in case of bad credit history. As long as you have a good credit rating, you can apply for these loans with banks as well as direct lenders, but the latter is the only option when you have an impaired credit standing.
Before you apply for these loans, make sure you compare interest rates and the length of the loan. Interest rates vary from lender to lender. Try to choose an affordable deal. Personal loans do not require collateral, so there is no risk of losing your asset. Whether you qualify for the loan or not depends on your credit file.
Unlike remortgages, it does not include a lengthy process. You can get funds the same day you put in the loan application. The length of these loans is shorter, and you can easily manage to pay it off.
Home equity loans
Home equity loans are also known as a second mortgage. The lender will decide the size of the loan based on the equity of your home. For instance, if the resale value of your house is £200,000 and your current mortgage is £100,000, the equity will be £100,000. If you have paid off the full mortgage, the equity will be £200,000.
These loans allow you to raise money without selling your house, which you can use for home restoration and consolidate existing debts. Since it is secured against the value of your house, you will likely get a lower interest rate. Further, you do not have to worry about market fluctuations like in case of remortgage. You will repay the loan over a period at a fixed interest rate.
Even though you are to repay the loan at a fixed interest rate, make sure that you have compared them. These loans are perfect for home remodelling if you know how much it will cost. You can borrow more than you need based on the equity of your home, but missing payments can take a toll on your credit score.
The loans mentioned above are ideal if you are looking to significant improvement in your house. If you need money for minor improvements, you can fund your needs with credit cards. Some cards come with 0% APR for a couple of months. You can use your card to pay for renovation without being worried about interest.
Before you use a credit card for home rehabilitation, you should know how much it would cost you. Make sure that you will be able to pay off the balance before the introductory period terminates. Otherwise, you will end up paying higher interest rates.
The final word
You can lose your house if you borrow money against it, which is why it is imperative to bear in mind that you can pay back the whole of the debt on time whether you apply for a remortgage or take out personal loans.
If doing up your home is at the back of your mind, you should start putting aside money. Savings can help you manage minor renovation without taking out a loan, and even if you need money for considerable improvements, you will need to borrow a smaller amount.
If you are not able to choose between the options, you should take guidance from a financial consultant or a broker. They will better guide you based on your current financial circumstances.