The best way to pay for home improvements
It might not feel currently feel like spring has sprung, but it’s on its way.
And when the winter weather finally stops and we begin to see sunshine and green shoots, we officially enter peak home improvement season. The period before, during and after Easter is prime DIY time, as we come out of enforced hibernation and start to spruce up our living environments. Last year Marks & Spencer Money reckoned that 28% of Brits planned to make home improvements over the Easter weekend.
Perhaps you have a few jobs you are planning to do this spring, but have you thought about how you will pay for them? In an ideal world the money would be sitting in the bank but, in reality, we sometimes need to borrow to make the changes we want to our homes.
So what is the best way to fund DIY?
Small job? Use your overdraft
An authorised current account overdraft gives you a quick and easy way to borrow money without having to apply each time you need a little extra cash.
It’s ideal for small sums that you can repay quickly, which is why many people use it just before payday in the knowledge they’ll be back in the black within days.
It’s also ideal for small DIY jobs that you want to get finished quickly. Say you’ve been meaning to paint the spare room all winter, for example, and now your in-laws are coming to stay in a couple of weeks. You could give the room a lick of paint before they arrive, no problem. And if you don’t have the £50 spare now to buy the paint, your overdraft lets you borrow the money temporarily, managing your cashflow until you get paid.
But be warned, overdrafts can be expensive ways to borrow with average rates now topping 15%.
Only borrow minimal amounts that you can afford to pay back in next month's wage and if you frequently dip into the red, you should switch to a current account that better suits your needs.
First Direct has a £250 interest-free overdraft buffer for example, while the Alliance & Leicester Premier Current Account charges 0% on its overdraft for the first year, after which there is a 50p daily usage charge capped at £5 a month.
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Plastic can be the perfect tool
If you need to borrow a bit more money for a bit longer an overdraft might not be suitable - for example, if you need a new bathroom suite, costing £750, and you know it will take you six months to pay that money back.
A cheaper option than going into the red could be to get a 0% purchase credit card which gives you interest-free credit on any purchases you make for a specific period. The best currently available is Tesco’s Clubcard Credit Card which gives you 12 months’ interest-free credit.
Alternatively you could buy the bathroom suite on your current credit card before switching your outstanding debt to a 0% balance transfer card, which will usually offer a longer interest-free period than a purchase card, giving you more breathing space to repay your debt. Virgin’s Credit Card offers the longest interest-free period at 16 months.
At the end of the interest-free period you revert to the lender’s APR, currently at a 12-year high of on average 18.8%, according to financial information provider Moneyfacts. So only borrow an amount you can afford to pay back within the introductory 0% period or it could become expensive.
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Bigger borrowing?
What if you need to fund significant home improvements, such as a new kitchen costing £4,000?
The most obvious route is to get an unsecured personal loan. They are simple and quick to arrange, you choose the amount you borrow and the term you repay it over, and the rates are keen, albeit not as keen as they were a few years ago!
The Post Office charges 13.9% on a £4,000 personal loan over five years, but some banks offer cheaper rates to their own current account customers, including Santander and First Direct.
However, there are some credit cards that offer a competitive alternative to loans. Low rate long-term credit cards are simple to arrange and charge you a low APR instead of offering a short-term 0% period. The MBNA low rate card charges just 6.7% on balance transfers and purchases for example -- cheaper than a loan -- although the rate is variable.
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Major works -- securing your borrowing
Some home improvement projects costs thousands of pounds -- or even tens of thousands. For example if you want a £15,000 extension to your property or a loft conversion, a credit card is not going to cut it.
You might need to secure your borrowing against your home, which you can do with your existing mortgage lender, a new lender or a secured loan provider.
Your existing lender may allow further advances, usually on the same terms as your mortgage and the sum is added onto your outstanding balance. They will only do this up to a maximum percentage of the property’s value, meaning you must have a certain level of equity in your home -- how much depends on the lender and the type of mortgage, but at the very least 10%.
If this is not possible -- usually because your lender has stopped offering further advances or you don’t have the equity they require, you could go elsewhere.
One option is to remortgage completely to a new lender and take out a mortgage for £15,000 more than your outstanding debt. You may also be able to secure a lower mortgage rate by doing this, but if you have little equity in your home you could still struggle to find a lender willing to offer you a deal.
Your final option is to keep your existing mortgage and opt for an additional secured loan from another provider, also known as second charge mortgages and homeowner loans. These work like standard loans in that they are easy to arrange and the money can be quickly sent to your bank account. But remember, if your mortgage lender won’t give you a further advance, it might not be wise to borrow more from a secured loan provider either.
With any secured borrowing your home is at risk if you can’t keep up repayments on the mortgage or loan. Also, because they are often repaid over a longer term than other forms of borrowing you could end up paying more in terms of total interest, even if the APR is lower.
Improving your home can increase the value of your property, or just make you happier, so it can sometimes be worth borrowing to get a job done. But as with any DIY, choose the right tool for the job to ensure you pay the minimum amount of interest possible for your particular borrowing need.
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