Borrowing To Improve Your Home

If you plan to extend, improve or modernise your home, then here are three ways to pay for this work.

Britain's passion for home improvements is alive and well, according to new research from Halifax, the UK's biggest mortgage lender.

The Halifax found that almost three-fifths of homeowners (58%) have undertaken some form of home improvements over the past year. Younger adults are particularly keen on feathering their nests, with almost seven in ten 18-34 year olds (68%) carrying out home improvements in the past twelve months.

Of course, as well as updating and modernising their homes, DIYers hope to enhance the value and improve the saleability of their properties. Indeed, a quarter of home improvers estimate that the work done will add £5,000 to the value of their homes. According to Halifax's annual Home Improvement Survey, the five most popular home improvements are:

So, how would you go about paying for these home improvements? Here are three options for you to consider:

1) Use cash or savings

As a reformed debt addict, this would certainly be my first choice. What's more, it's likely to be the cheapest option, since all you stand to lose is the interest on the money you put to one side or withdraw from your savings account. However, if you can't afford to fund your home improvements from your regular income, and you don't have an emergency fund or nest egg to fall back on, then your next option might be to...

2) Get an unsecured personal loan

These are known as 'unsecured' personal loans because they are not secured on your property. In other words, if you don't keep up the monthly repayments, you aren't likely to lose your home (although it is possible). Alas, choosing a personal loan is far from simple, as there are hundreds of different loans from which to choose. If you want to borrow from £1,000 to £25,000 without putting your home on the line, then don't move a muscle until you've read my twelve tips in The Loan Arranger Rides Again.

3) Borrow against your home

If you're planning some major work on your home, such as an extension, loft conversion, new kitchen or bathroom, then you'll probably need to borrow more and over a longer period. In this situation, you may decide that a secured loan is your best option. Although secured loans have their critics (and I'm one of the most vocal!), they do enable sensible homeowners to borrow cheaply against their properties.

If you do go down this route, then the first step is to ask your mortgage lender how much extra it will cost to extend your existing home loan, as this is often the cheapest option. If you don't wish to approach your existing lender for whatever reason, then next look into remortgaging with another lender.

Your next step is to shop around for a secured loan, also known as a second mortgage (because that's exactly what it is). However, this market can be dangerous, so watch out for bandits -- especially those which advertise in the back of newspapers or on daytime television!

As with all borrowing, your goal should be to minimise the amount that you repay, so pay close attention to the interest rate (which may be variable) and fees being charged. Furthermore, be sure to get written details of all charges for credit, plus the total amount repayable (TAR), which should include all interest and charges. Get it right and the TAR for a £25,000 loan over five years could be as low as £29,775 (7.34% APR). Get it wrong and the total could be as high as £38,884 (21.27% APR). Ouch!

Finally, don't be tempted to borrow more than you need and, while taking affordability into account, aim to arrange your loan over the shortest period possible, as this will minimise your final interest bill. In addition, don't become too eager on keep on borrowing against your home, because it's your dwelling, not a cash machine!

More: Find top-notch personal loans and secured loans via The Fool | Lessons From The Last Housing Crash | Say Goodbye To Cheap Personal Loans