What is the Most Cost-Effective Loan for Home Improvements?  

Planning some home renovations or improvements? Need to borrow money to pay for it and wondering what the best loan options may be? Take a look at our handy guide first.

If you’re considering doing some work to your home you could find that you need to borrow funds to do so. But what’s the most cost effective way to go about it? It all depends on what you’re hoping to achieve and how much you think the work will cost. Plus, another factor can be your credit history.

How much do you want to borrow?

Home renovations can be expensive, especially if you are building an extension, fitting new bathrooms or a new kitchen. The costs can easily run into the thousands and, if you’re planning on taking out a loan, you need to make sure that the repayments are affordable.

The type of loan you need will depend on how much you want to borrow and what your personal circumstances are.

What different types of loans are available?

There are two main different kinds of loan available for home improvements. These are unsecured loans and secured loans.

What is an unsecured loan?

An unsecured loan is borrowing that is not secured on collateral, such as a property, so it is riskier for the lender. As such, the repayment periods tend to be shorter – two to five years - and the interest rates charged higher than those on a secured loan. Generally, the amount you can borrow is between £5,000 and £25,000. These are probably more suitable for minor home improvement projects, such as installing double glazing or remodelling a small kitchen.

To get an unsecured loan the lender will be looking for a good credit score and the ability to keep up repayments, so they will take your salary and affordability score into consideration.

While you won’t lose your home if you default on the repayments, you could end up with County Court Judgements against you, which could damage your credit rating and make it more difficult to get credit in the future.

What is a secured loan?

A secured loan uses an asset of some kind as collateral for the loan. Although it can also sometimes be jewellery or other valuables, such as a car, the most popular form of security is property.

You can usually only apply for a secured loan if you are a home owner with equity available in your property. Because of this, these types of loans are sometimes called home improvement loans.

This type of borrowing is often a good option if you are looking to borrow a larger sum over a longer period because, depending on affordability, you can generally borrow between £15,000 and £100,000. What’s more, the repayment periods tend to be between 5 and 25-years.

This makes secured loans a good option if you are looking to make major improvements to your property, such as an extension or rebuilding work, but you need to make sure that you can afford the repayments.

However, as the loan is secured against your home, if you fail to make repayments the lender could repossess it to get their money back.

Access to loans for over-55s can come with challenges. Speak to our mortgage and loans experts Fluent Money who are on hand to talk through your options and give you the best advice. Book a free call now.

What if I have a poor credit score?

If you have a less than ideal credit history you may actually find it easier to get a secured loan than unsecured borrowing because it is a less risky proposition for the lender.

How much interest will I pay?

It’s worth remembering that if you take out a secured loan over 25-years you will also be paying interest on it for 25-years, making it more expensive in the long run, even if the interest rate is lower than that charged on an unsecured loan. However, if you expect your property to increase in value over that period and thanks to the improvements you’ve made, you may feel it is worth it.

What if I want to repay the loan early?

On a secured loan you could find that the lender imposes penalties for early repayment, so it’s worth checking first. However, they may offer the ability to overpay or make additional overpayments throughout the lifetime of the loan. If you wish to repay the borrowing early, ask your lender for an early settlement figure so that you know exactly how much you need to pay to settle the loan.

What are the alternatives?

If you have equity available in your property, you could remortgage instead to release funds for home improvements. You could find that this is more cost effective.

Depending on the sum you need, if it’s a smaller amount you could also choose to borrow it on a credit card with a zero interest rate period. However, you’ll need to make sure that you can repay the money in time before the introductory interest rate period ends.

Always think carefully before securing a loan on your home.

Written by Piper Terrett, Fluent Money Group