Making home improvements can significantly increase your living space, brighten up your home and add value to your property.
Adding a loft conversion with an extra bedroom and bathroom can add up to 20% to the value of your home, a new conservatory (7-11%) and new kitchen (around 4.6%).
But since the cost of a home improvement can set you back thousands of pounds, we look at the most common ways to finance your renovations.
Using your savings
Using your personal savings from over the years is a very pragmatic way to pay for any home refurbishments. Whilst the costs of builders, planning permission, architects and materials can really add up, using your own income means that you do not have to pay any interest on your refurb and you are maximising your earnings when you resell it.
However, you must be aware that projects can often be more expensive than predicted and there may be additional costs if you have any snagging or have to temporarily move out whilst work is underway.
Unsecured personal loan
If you have to borrow money to fund your new kitchen or home office, an unsecured personal loan allows you to borrow up to £25,000 (or more depending on the lender), typically for up to 7 years. Since the loan is unsecured, your eligibility is based largely on your affordability and credit history.
Provided that you have maintained a good credit score and do not have a lot of outstanding debt, the lowest rates available can start from 2.7% or 16% APR for less than perfect credit scores.
If you cannot keep up with repayments, you do not risk anything being repossessed, since the loan is unsecured, but you are likely to incur penalties and damage to your credit rating.
Whilst some lenders may advertise payday loans for home improvements, this form of finance is better used for home emergencies such as broken boilers and flooding and borrowing smaller amounts such as £300 or £400. (source: allthelenders)
Guarantor loans are commonly used by those with bad credit as a way to fund home improvements. Since the applicant has a poor credit history, they may have been turned down by mainstream banks and lenders. With the help of a guarantor such as a family member or close friend, they can leverage the other person’s good credit history to access finance of up to £15,000.
The guarantor essentially ‘backs up’ the loan and agrees to pay if the main borrower cannot. For the lender, it gives peace of mind knowing that someone with a good credit history is contactable and willing to repay the outstanding debt. (Source: Citizen’s Advice Bureau)
Secured loans against a vehicle or property are commonly used to consolidate debts, fund home improvements or a combination of both together. The customer is able to borrow a large sum, usually starting from £50,000 and their property is used as collateral. So if the individual is unable to keep up with their repayments, the lender has the right to repossess their property and sell it on the open market to recover their funds.
The rates for secured loans are typically quite low, starting from around 5%, since it leverages the value of the existing property to help homeowners get the finance they need.
Equity release is another form of finance that is advertised as a way to pay for home improvements. This is commonly used for homeowners who are 55 and above and it is a way of selling off part of your existing property so that you get a cash sum upfront. Then, when you die and are no longer living in the property, the lender receives ownership and can sell it at a higher price.
This method is less suitable for those who are looking to update their home and sell it for a higher price. However, it might be appealing for those who are looking to make home improvements to pay for a better living in their current property. This could involve adding extensions or equipping the bottom floor of the home to be better adapted for senior living.
Source: Main home business mag
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