A handy guide to home improvement loans

Keen to improve your home, but don’t have the cash saved up? Find out what a home improvement loan is, and if it’s the right solution for you.

Perhaps you’re planning a little light decorating, adding some essential central heating or a doing a loft extension fit for a king. Whether you're after a nicer place to live, or an easier place to sell, kitchens, bathrooms and extra bedrooms don’t come cheap, so you’ll need to raise some money.

Using savings will typically be the best way to pay, as you won’t have to fork out for any interest or fees. However, if you don’t have enough cash, or the time to save up, you might consider borrowing the money.

Typically, home improvement loans are a type of unsecured personal loan.

As with any loan, you borrow the money, and agree to pay it back, plus interest, in monthly chunks over a set amount of time. 'Unsecured' means the loan is not secured against your property. This has the advantage that you won’t lose your home if you can’t keep up with the repayments.

However, it also means that the interest rate may be higher than on a ‘secured’ loan. As unsecured loans are not guaranteed against any kind of property, lenders tend to view them as higher risk, and so charge higher interest rates.

You could use any unsecured personal loan to fund work on your home.

However, with a loan specifically advertised for home improvements, you may be able to borrow more money for longer. Perhaps even beyond the £25,000 maximum for most ordinary personal loans. And rather than paying the loan off over one to five years, with some specific home improvement loans you might be able to stretch payments over anywhere up to 10 years.

Paying a loan back over a longer time could make the debt more affordable, because it shrinks the size of the monthly repayments. However, you will end up paying much more interest in total than if you made higher payments over a shorter time.

The interest rate you’re offered will also depend on your own specific circumstances, particularly your credit score and your financial situation.

If you’d like a sense of the interest rates out there, it's worth spending a bit of time researching different loans online. It’s also good to use an eligibility checker before you apply for a loan, so that you aren’t applying for loans you are likely to be turned down for.

As alternatives to using a home improvement loan, you might also consider borrowing on a credit card, via a secured loan, or by remortgaging your house.

1. Credit card

If you’d like to borrow a smaller sum for a shorter time, you might consider flashing the plastic. If you have a 0% interest credit card (sometimes known as a purchase credit card) for example, it may have an interest free ‘offer period’ on purchases. If you pay off your during the offer period, you can avoid paying any interest at all.

However, you will probably need a good credit score if you want to qualify for a larger limit over a longer time – the better your score the better the terms a provider might offer you. You can check how likely it is that you'll be approved for certain credit cards by logging in to your ClearScore account. It's also worth reading more about the different types of credit cards and how they work before you use one to spruce up your home.

2. Secured loan

If you’re planning a major extension, you may need a major loan to match.

For larger amounts, you may need to consider a secured loan, where you borrow against the value of your home.

By securing the debt against your property, you may be able to get a lower interest rate than on an unsecured home improvement loan. And you should also be able to pay the money back over a longer time – you may be able to stretch the repayment period out to between 20 - 25 years.

Just bear in mind that even at a lower rate, if you pay the money back over many more years, you’re likely to pay more interest in total.

For example, if you borrow £10,000 as a personal loan at 8% annual percentage rate (APR) over five years, you will pay £201 a month and £2086 in total interest.

However, if you borrow the same £10,000 as a secured loan for 20 years, even if you pay half the interest at 4% APR and see lower monthly payments at £60, you will pay £4453 in total interest.

The interest rate and the amount you can borrow will depend not just on what you can afford to repay, but also on the equity in your home.

If you already have a big mortgage compared to the value of your home, you may not have enough equity to borrow much more.

Also, you will end up with two different loans secured on your property – your original mortgage and the new home improvement loan. Juggling two different interest rates and loan terms could be tricky if you want to swap to a different deal in future.

3. Remortgage

If you already have a mortgage, rather than taking out a separate loan, you might investigate swapping to a new mortgage deal for a larger amount.

By remortgaging for a larger sum, you can release the extra money for home improvements.

As an added bonus, mortgage interest rates are currently running at record lows. If you can remortgage to a cheaper interest rate, you might find that even after taking out a bigger loan, you end up with similar or even cheaper monthly repayments.

As with a separate secured loan, any extra amount you can borrow will be limited by the equity in your home.

Before leaping into a new mortgage, it’s worth checking if you’ll have to pay any early repayment charges to get out of your existing loan. If you are already paying your lender’s standard variable rate after any special deal finished, you probably won’t get stuck with early repayment charges. Instead, you might only face a small exit fee.

You may also find that it’s harder to remortgage than it once was. Tighter mortgage rules since 2014 mean you may face stricter checks on whether you can afford the repayments. In practical terms, you may have to fork out an application fee, sit through a lengthy affordability interview and show details of your income and expenditure.

As with any financial question, it’s worth doing your research to find out the best way to finance the things that matter most to you. And now you know your facts, it might help you build, rebuild or design the house you’ve always dreamt of.