Five cheap ways to fund home improvements

Don't pay a heap of interest when you do up your home!

Moving home can be stressful, frustrating and downright expensive. What's more, with the property market limping along, lots of sales are falling through.

Improve, don't move

Hence, millions of Brits are deciding to stay put and improve, rather than move.

A recent report from Legal & General, Changing Face of British Homes, found that almost half of us see making home improvements as a priority for the coming year. On the other hand, fewer than a quarter of Brits (22%) see moving to a bigger home or a better area a priority in the year ahead.

However, before putting your personal stamp on your property, you need to plan ahead and budget properly. With a new bathroom or kitchen priced at perhaps £10,000 and a double-storey extension costing at least £25,000, you must your sums right. Otherwise, you could end up paying a fortune in unnecessary interest.

Here are five cheap ways to finance your home improvements:

1.     Savings

No matter what the outlay, it's almost always better to spend your savings, rather than borrow. However, there are a few exceptions to this rule, such as interest-free store credit and 0% cards (see below).

What's more, with savings rates hovering near all-time lows, only a handful of easy-access savings accounts pay interest of more than 3% a year before tax. After basic-rate (20%), this falls to a feeble 2.4% a year. Thus, every £1,000 of savings withdrawn should cost you less than £24 a year in lost interest.

Before, taking out your cash from your savings account, please check to make sure that you won't have to pay withdrawal penalties or forfeit some accrued interest.

2.     Remortgage

With mortgage rates plumbing record lows, moving your home loan can save you a fortune. Remortgaging to a lower rate reduces your interest bill and lowers your monthly repayments.

To pay for home improvements, you can remortgage to get a larger loan. The surplus can then be used to do up your property. However, be warned: spreading this additional borrowing over, say, 25 years may mean paying low rates of interest, but your interest bill really mounts up over decades.

Of course, you don't need to remortgage with your existing lender. If it can't give you a great deal, then shop around for a cheaper home loan via an independent, no-fee mortgage broker.

3.     Secured loan

I've never been a fan of secured loans, as I witnessed thousands of homeowners come unstuck due to these loans during the property crash of the early Nineties.

Even so, they sometimes have their place.

The cheapest secured loan I could find for £10,000 over five years has monthly repayments of under £194 and a total amount repayable of £11,635. Thus, your interest bill is £1,635, spread over a decade. The interest rate is 6.3% APR, which is cheaper than almost but one unsecured personal loan.

However, the vital thing to note about secured loans is that they are secured against your home. Therefore, if you don't keep up your repayments, then you could lose the roof over your head. In short, I wouldn't put my home at risk purely to pay a few pounds less each month.

4.     Personal loan

Next up are unsecured personal loans, which won't put your home (and any improvements) at risk. One in five of all unsecured personal loans is used to pay for home improvements, according to research from Sainsbury's Finance.

The good news is that the interest rates charged by personal loans have been coming down in 2011. In particular, Sainsbury's, Marks & Spencer and Nationwide BS are undercutting rival lenders, as you can see from my Best Buy table for personal loans of £10,000 over five years: 

As you can see, you can borrow ten grand for 60 months and pay under £1,635 in interest. I reckon these are cracking deals, but only borrowers with perfect credit histories need apply for these loans.

5.     0% credit card

Lastly, by using a 0% on purchases credit card, you can spread the cost of a major purchase over an extended period, without paying a penny in interest. In fact, you can avoid interest for up to 15 months, as my final Best Buy table shows: 

With the table-topping cards from Tesco or M&S, you could spend, say, £6,000 and then repay this over 15 months at £400 a month, with no interest to pay whatsoever. And with the Tesco Bank Clubcard Credit Card MasterCard you’ll earn the equivalent of up to 6.75% cashback as well.

Here's hoping your home improvements brighten up your home life, too!

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