Knowing whether you should remortgage for home improvements can be a difficult decision. With the value of a lot of people’s homes over the past few years raising in value, there’s a lot of money locked up within the equity of their homes.
Remortgaging to fund home improvements can definitely be a good option for some people, giving them the cash they need at relatively low-interest rates. However, there are times when it doesn’t make sense as well as other things to consider, which I’ll cover in this post.
Ways to Finance Home Improvements, Other Options?
|Finance Option||Interest Rate|
|Remortgage (80% Loan to Value)||2.10%|
|Remortgage (70% Loan to Value)||1.90%|
|Remortgage (60% Loan to Value)||1.60%|
|Personal Loan||3% to 6%|
|Savings||0% to 1% (lost savings interest)|
|Credit Card||1% to 30% (balance transfer – risky)|
As you can see there are many options available to finance home improvements and below I’ll give a bit more detail on each option.
- Remortgaging (1.5% to 3%). The interest rates shown above are from general price comparison websites and subject to change, especially with the recent changes in interest rates. There are a varitey of factors that can influence what percentage interest rate you are offered. I’ve run through a number of these factos and how an equity release remortgage works later in the post.
- Personal Loan (3% to 6%). Depending on your level of income and expenses, personal loans are available however they are difficult to get at higher amount of money. This is usually because lenders want to have collateral to reduce their risk, which is why larger sums of money are easier to get through a mortgage, as they can take you house if you don’t pay your mortgage.
- Savings (0% to 1%). The percentage here indicates what money you could lose out of if you were to hold the money in a regular savings account. Depending on your personal circumstances, many people may not be able to fund the entire renovation from savings, however if you do, you have to think about the opporuntiy cost of that money. This could also include if your money is in other types of investments like stocks, bonds or other property.
- Credit cards (1% to 30%). Depending on the amount you need for your renovations, credit cards may only be able to offer up to £10,000. Many credit cards offer the ability to withdraw money usually for a small upfront fee of 1% to 2% of the total balance you want to borrow. This money is usually at zero interest rate for a certain amount of time, such as 18 months, however once that period ends you need to pay in full or can be moved onto very high interest rates, which is why I’ve highlighted 30% however could be even higher. You can look into doing a balance transfer, so effectively borrowing money again with a different card, however this can be very risky if you don’t know what you’re doing.
When Is Remortgaging to Renovate a Bad Idea?
Locked Into A Fixed Mortage Period
If you’ve signed up for a fixed-term mortgage, which is usually between two to ten years, there may be penalties for canceling the product within the initial term. These penalty costs can be between 1-5% of the full amount you’ve borrowed so can be quite a significant fee if you work out the costs to access the money.
The end of your fixed term is usually the best time to remortgage as this is the time when your mortgage interest rate is usually switched onto a higher variable rate and you’re more than likely going to be looking for a new mortgage product anyway.
Mortgage Payments Are Not Affordable
Depending on how much money you need for your home renovation, by doing an equity release for tens or even hundreds of thousands, your monthly mortgage payments can increase quite significantly.
If you’re currently struggling to pay your mortgage, or not having as much money as you’d like at the end of each month to enjoy or save, then it may be best to hold off on the renovation or reduce the costs.
If you are struggling to pay your current mortgage, you may even get denied for a new mortgage on the ground of affordability so make sure to keep that in mind.
In order to keep the mortgage payments affordable, a lot of people extend their mortgage terms when they do an equity release. Whilst this can make sense if you have your heart set on the renovation, just remember that you’ll be paying your mortgage for longer.
If you were hoping to retire by a specific age, this could push out that date and mean you have to keep working for longer. The benefits of a nicer house could be worth the extra few years of work, however, make sure you’re taking this into consideration.
Add Value to Home Before Selling – Short Term
If you’re thinking of renovating your house before you sell it to try and increase the value, make sure you proceed with caution. Not all home improvements will add value to your home.
Research carried out by Zopa claims that new kitchen and loft conversions can get you the best ROI.
Also if you’re considering selling your house in the near future remortgaging may put you onto a new fixed-term rate which will be expensive to cancel. Paying for the renovation without an equity release, for example, through a personal loan or savings may make the most sense financially when you add up the mortgage fees.
How Does Remortgaging to Release Equity Work?
Major home improvements can cost tens of thousands depending on the work you’re wanting to do. Some people may just want to enhance one room, although others are looking for a complete overhaul with double story extensions and removing walls.
One of the main questions is how to finance these home improvements, and releasing equity by remortgaging is one option to fund this work.
If you have a fixed-rate mortgage you’re more than likely going to remortgage when it comes to the end of the fixed period. When you come to remortgage, you can apply for an additional amount of money, effectively increasing your loan to value ratio and pulling out some of your current equity.
Most lenders allow you to remortgage for home improvements, however, they’ll still look at a variety of factors including your income, spending habits, credit report, loan to value ratios, and more.
For a complete overview, this post I’ve written on what mortgage lenders look for on a mortgage application may be useful to ensure you’re ticking the right boxes.
Searching for a New Property – Benchmark
Depending on the total value of the renovation, it’s a good idea to look for a property in the local area to help you understand whether you’re making the right decision.
If your house is already the largest and most expensive on the street, spending tens of thousands to make it bigger and more luxurious may not add much value to the property price. This can be ok if you’re not wanting to sell the property and are doing the home improvements to get the benefit out of it yourself, however just make sure you’re aware of this before you spend the money.
Looking for different properties in the area can also be a good benchmark to help with the question of whether you should renovate or move. Depending on the extent of the renovation, moving can actually be easier than living in a building site for 6 or more months, believe me, I’ve had first-hand experience of how painful this can be!
Moving can also be the cheaper option. For example, say your property is worth £300,000 and you’re wanting to do a £75,000 major renovation to possibly add more rooms and upgrade a load of features. Looking for properties that are worth around £375,000 in the local area, you may be able to buy what you’re looking for, or even more, without having to live through the renovation or run the risk of it overspending. Just remember to factor in moving costs.
Looking at other houses may also help give you inspiration. For example, if you’re wanting to knock through the kitchen and living room to make an open plan living space, going to see a property can help you picture the end result and may even help give you design ideas.
Summary – So Should You Remortgage for Home Improvements?
Overall as you can see, doing an equity release remortgage isn’t the only way to fund your home renovations. There are many other options including using savings, personal loans, credit cards or even scrapping the renovations altogether and just moving home.
However, depending on the amount of money you need, remortgaging can be the best way to finance the loan at the lowest interest rate.
If you’re wanting to remortgage, speaking to a mortgage advisor can be very helpful as not all lenders allow equity releases and may offer slightly different terms. This post I’ve written on what to ask a mortgage advisor may also be a useful read.
Hi, I’m John. I’ve always had a keen interest in Finance, so much so that I’ve made a career out of it! This site is a place where I can share everything I’ve learned as well as give me the excuse to research certain topics.
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