If you are planning on doing home improvements in 2009, have you considered how you will pay for them?
If you are outgrowing your property or are getting sick of your four walls you have three options: move house, improve your house, or put up with it. Assuming you want to do something to change your living space you can either move or improve.
But with house prices sliding and job insecurity rising it's understandable that many people do not want to commit to moving home and the associated costs at such a difficult time.
Why not DIY?
Home improvements can range from a lick of paint to a loft conversion or full extension and of course the cost varies wildly too. Tiny jobs might be able to be paid for out of your day-to-day finances, such as a pot of paint or new door handles. But beyond a couple of hundred pounds you might have to start thinking about borrowing, unless you are lucky enough to have money squirreled away.
There are different ways to borrow and which you choose can depend on how much you are planning to spend.
Small jobs
Small jobs like painting and maybe even wallpapering you might attempt yourself, and they tend to cost a few hundred pounds up to perhaps £1,000. New internal doors, fitting a new shower or adding fitted wardrobes are all the sort of job that constitute an expense, but one you can just about live with.
If you need to borrow a sum between £200 and £1,000 there are two easy ways to do it. Firstly, you could put it on your overdraft and gradually repay the debt. Of course, whether or not this is a good idea depends on your current account and your overdraft rate and terms. Alliance & Leicester for example has this current account, with a 0% interest rate on its overdraft, which would be perfect for this type of job. But check with your own current account provider as the average overdraft rate is a pricey 10% plus.
The other option is a credit card, which could be ideal for small jobs, especially if you have a 0% interest rate on purchases on your card. Halifax's One Online Special card offers 0% on both balance transfer and purchases for 10 months.
Both overdrafts and credit cards can be pretty expensive unless you bag yourself a 0% deal. Typical rates for both will be in double digits (credit card typical rates are on average 17%) but they are quick and easy ways to borrow, and since it shouldn't take you too long to repay a small amount, the high rates are acceptable.
Medium-sized jobs
Some home improvements involve the type of work you probably need to pay somebody to do for you. Fitting a new kitchen, recarpetting the whole house or getting new windows will cost you anything from £1,000 to £8,000. At the lower end of this scale a credit card or your overdraft might still do, but once you get beyond £5,000 -- a luxury fitted kitchen or a small conservatory -- you might be better off with a loan. And depending on your finances you may need to repay this level of borrowing over a few years.
Unsecured personal loans are one way of borrowing reasonable sums of money over a period of a few years. They are straightforward to arrange and the money can be in your account within days. Rates have increased over the course of this year (despite the Base Rate cuts) and now there are a few loans available under 9%. Halifax and Bank of Scotland are offering the best buys at typical APRs of 8.6%, while Alliance & Leicester is charging just 0.1% more, at 8.7% typical APR.
Large jobs
If you want to really improve your home you might be thinking of a large project such as an extension, a loft conversion, or perhaps a combination of different projects that add up to a large sum of, for example £10,000 to £20,000. This is not the sort of money that you can stick on a credit card, nor can you usually borrow such an amount on an unsecured personal loan.
You could take out a secured loan (also sometimes known as a second charge mortgage) which are available to homeowners, and are secured on your property. They are sometimes cheaper than unsecured personal loans and you can usually choose your repayment term to run alongside your remaining mortgage term, or decide to repay the debt over a shorter period of time.
However, you are putting your home at risk when you take out one of these loans, so it's not a decision you should take lightly.
What's more, secured loan providers have been hit hard by the credit crunch, being one of the worst affected sectors. There are far fewer providers in the market now than a year ago and rates have increased, not decreased. So you could actually find it quite difficult to get a secured loan now, unless you have a great deal of equity in your home.
Alternatively, if you're a homeowner, you could remortgage or take out a further advance to raise the money to fund your home improvements, assuming you have sufficient equity in your property. If you remortgage you usually change your mortgage to another deal (with the same lender or another), at the same time increasing your borrowing to release equity. With a further advance, your existing lender usually increases your mortgage allowing you to release equity, but you mortgage deal remains the same.
Either way, you could currently have a problem as house prices have fallen by 15% over the last 12 months and lenders have become extremely cautious about how much equity they will let remortgagors release. The maximum you will probably be able to remortgage to is 75% of your property's value.
What's more, if you mortgage your property up to the hilt, you could be left in negative equity if house prices fall further and your property is no longer worth the amount of mortgage debt you have taken on.
Furthermore, while remortgaging or taking a further advance seems relatively cheap, remember that if you are repaying a large debt over a longer term than a personal loan or credit card, the total interest you will pay could actually be higher than other forms of borrowing.