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Fed up with draughty windows, squeaky drawers or a dated bathroom?
Getting work done on your home can be a pricey business: the average renovation spend in the past five years was £52,000, Nationwide estimates.
If you’re worried whether your savings will stretch, there are several ways to spread payments.
To help you understand what you can afford, and which financing options you can choose from, we’ve separated home improvements into three price categories to explain the pros and cons of different payment methods, depending on the size of the job.
This budget covers more limited jobs – from painting a large room or the exterior of your house, up to getting windows and doors replaced. If you don’t want to dip into your savings, you could use a credit card or an unsecured personal loan.
A loan is likely to work out cheaper than the credit card(s) you hold. We compared the lowest credit card rate (8.9%) with the best loan rate for borrowing £5,000 (6.9%), and found that spreading the cost over three years with the loan would accumulate £532 in interest, while with the credit card you would pay £709.
But with a typical credit card (APR of 26.7%) you would rack up a painful £2,358 in interest. However, if you’re able to pay off what you borrow relatively quickly, and don’t mind applying for a new card, you could avoid paying interest altogether.
The best interest-free credit cards currently offer 0% periods of up to 25 months, though you’ll have monthly minimum repayments to meet. You’ll also get Section 75 protection for purchases over £100 and under £30,000 in case of a dispute with the provider.
The best interest-free credit cards currently offer 0% periods of up to 25 months
An interest-free credit card won’t work if you need to pay by bank transfer, or in cash, as you’ll be charged interest on cash withdrawals from day one.
Credit card cash withdrawals can also negatively impact your credit score, which could make it harder for you to borrow in future. In these cases you could use a credit card with a money transfer option (many cards that are designed for balance transfers include this option).
A money transfer allows you to move a sum from your card into your bank account, which you then have a specific period to repay without incurring interest (as long as 14 months). In exchange you’ll pay a fee, on average 3.99% of the sum borrowed; the notable exception is Virgin Money’s 24-month balance transfer card, which offers 12 months interest-free on money transfers, with no fee.
As with other credit cards you’ll need to make monthly repayments. For both loans and credit cards, wherever possible use lenders’ eligibility checkers before applying. Several applications in a short space of time on your credit report can spook lenders.
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Home improvements in this price bracket include installing underfloor heating, solar panels or redoing a bathroom.
If you’ve just got a new credit card, you may not be given a credit limit high enough to cover such projects. You could instead use an unsecured loan or a secured loan, typically with your home as security.
Due to the increased risk to the lender, an unsecured loan will have a higher rate. However, the interest rates charged for these are typically lower than for sub-£5,000 borrowing, and when we looked at the rates for borrowing £10,000, £15,000 or £25,000 loan, the best rates were identical, at 5.6%. Unsecured loans are potentially faster and easier to obtain than secured loans, so they’ll suit jobs that are required more urgently.
However, bear in mind that you will typically need to repay the loan more quickly: most personal loan terms go up to five years.
With a secured loan, you could have decades to pay it off
Only Tesco Bank currently offers new customers loans that can be repaid over 10 years, of up to £25,000. You’ll need a Tesco Clubcard to get the lowest rates, which are still higher than Tesco loans for periods of less than seven years.
With a secured loan, you could have decades to pay it off. If you have a mortgage, you could borrow more from your lender on your existing deal, or remortgage (just watch out for early repayment charges on your current mortgage).
If you have paid off your mortgage, you could get a new mortgage, known as an unencumbered mortgage. A mortgage broker can find suitable deals and work out the repayments you’ll face.
Although some charge a fee, many get paid via commission from the lender. The main barriers to getting a secured loan are lengthy affordability checks and a valuation of your home. A small minority of mortgage lenders set an age limit for paying off your mortgage, which is 78, on average.
And in all instances, you’ll need to be able to make regular repayments. If you’re not able to make repayments and if you’re over 55, then equity release could be an option (more on this in the next section).
However, rates are typically higher than ordinary mortgages, at 7.73% on average, and arrangement fees can make them uneconomical for mid-sized projects. You’ll need to take financial advice before borrowing in this way.
You’re spending thousands of pounds, but you’ll make it all back when you sell… right?
Analysis by Nationwide of the homes it has mortgaged found that extensions or loft conversions that add a bedroom can increase the value of your home by up to 24%, adding an extra bathroom can add 4%, and increasing the floor plan by 10% can increase the house price by 5%.
However, property prices are unpredictable. Land Registry data published in January showed UK house prices rose year-on-year by 2.5%, which, though underwhelming, is at least positive. But house prices in London fell year-on-year.
It’s possible that in your area, for your type of property, prices fell and could fall again next year. That’s why it’s best to see home improvements like investments, to be held for several years, and accept that selling sooner carries risks. Also consider the type of home improvement. Increasing floor space or adding new rooms is easily quantifiable. Redoing a bathroom, kitchen or redecorating is harder to quantify in terms of added value, because personal taste is a big part of the equation.
Now to the big-ticket items: think kitchen makeovers, loft conversions and extensions.
You’ll generally need to take out a secured loan for this level of borrowing. It’s vital you work out whether you can afford the repayments, especially if you plan to pay off the debt relatively quickly. Suppose your home is worth £400,000 and you have £100,000 left on the mortgage, with five years remaining on the term.
If you selected a five-year fixed remortgage for the remaining five years and borrowed an extra £50,000 to fund home improvements, your monthly repayments would rise by £916 a month to £2,748, based on the best rate (checked 11 February). If you’re 55 or over, equity release with a lifetime mortgage enables you to borrow without making any repayments until the property is sold, you pass away or you move into long-term care.
Debt can snowball, and you might not be left with much value in your home to pass on to loved ones
But this means the debt can snowball, and you might not be left with much value in your home to pass on to loved ones (although lenders signed up to the Equity Release Council guarantee you’ll never owe more than the property’s value).
If, at the age of 65, you borrowed a lump sum of £50,000, on a house valued £400,000, you would owe £184,250 by age 85. If you had borrowed at age 55, it would be £400,615, due to the extra decade of interest accruing and a higher rate of interest typically charged to younger equity release borrowers (7.18% AER is the best rate, compared to 6.74% for 65-year-olds).
You’re required to take financial advice prior to taking out equity release, so ask the adviser to work out the numbers for you to weigh up.
Speak to the experts at HUB Financial Solutions, they'll be able to help
Go to HUB Financial SolutionsIf you take out an equity release product recommended by HUB Financial Solutions, Which? will earn a commission to help fund our not-for-profit mission
