So you'd like to carry out some home improvements - but you're not sure where the money's going to come from. Here's a step-by-step guide to all your borrowing options.
As summer approaches, you might be thinking about home improvements.
Wouldn't it be nice to have a conservatory, a gazebo or even a swimming pool? Thing is, how should you fund these improvements?
The best way
The ultra-Foolish, prudent approach is not to borrow. Borrowing costs money. So if you have savings, it makes sense to use that cash instead.
That said, I wouldn't advise blowing all your savings on a gazebo. If you have some money put aside, it makes sense to leave some for a `rainy day.' After all, no one's job is 100% secure these days and we may be entering a recession.
If you don't have any savings, I'd urge you to consider putting off your home improvements for a while and saving up to pay for the work instead. Saving is particularly attractive these days as there are several accounts out there paying interest of 6.5% a year. One example is the Alliance & Leicester eSaver account.
Don't get me wrong though, I know that saving up for several years can be pretty dull, so you may prefer to borrow instead. I've done that myself in the past and I will probably do so again. So let's look at the various options.
Personal loans
Personal loans have several pluses. The interest rates can be relatively low -- around 7% -- and these rates tend to be fixed for the duration of the loan. And crucially, the loan isn't secured against your home.
With a mortgage, it's relatively easy for a lender to repossess your home if you fall behind on your payments. But it's much harder for a lender to repossess your home if you have a personal loan.
On the downside, most personal loans have a maximum loan amount of £25,000, so a personal loan won't fund a really major piece of construction work.
Secured loans
As the name suggests, secured loans are normally secured against an asset, normally a home. So they're clearly riskier than personal loans.
However, in their favour, you can often borrow more than £25,000 and you may be able to take out a loan with a longer duration than for a personal loan. (But arguably that's not a plus, as a longer duration means that you'll end up paying more interest over the life of the loan.)
Let me stress again: secured loans put your home at risk. But if you're confident you're not going to have any problems repaying the loan, then they're worth considering. However, there are three more options to look at yet.
Remortgage
If you're coming to the end of your current mortgage deal, then remortgaging may be the answer. Just add the cost of the home improvement work onto your outstanding mortgage debt and you're sorted! What's more, you'll probably be offered a lower interest rate on your mortgage than you'd get on a separate secured loan.
That said, you'll still have to pay off the debt at some point, and you might be taking out a mortgage for as long as 25 years. That means you'll end up paying a lot of interest on the home improvement debt even if the mortgage rate is relatively low.
And if you're not coming towards the end of your current mortgage deal, you may be hit by early repayment charges if you remortgage now.
Plus, increasing the size of your mortgage means higher monthly payments -- and you are, again, putting your home at risk to pay for the improvements.
Further advance
Instead you could ask your current lender for a `further advance.' Once again, this will probably be at a lower rate than a secured loan although it won't necessarily be at the same rate as your original mortgage.
The advantage of this approach is that you won't be hit by early repayment charges on your current deal.
But you will be stuck with your current lender so you can't go off and sign up for the best deal on the market.
And finally.......
Don't forget the good old credit card. If, say, you're buying a kitchen at an out-of-town retailer, you could use a 0% on new purchases card and not pay any interest for ten months or more.
Or you could use your current card and then transfer the debt to a 0% balance transfer card. The Virgin Money Mastercard won't charge you any interest for 15 months although you will to have pay a 3% fee.
So there you have it, six ways to fund home improvements. If you move quickly, you may be able to get the work done so that you can enjoy any `Indian summer' we might get in September or October. No doubt, this spell of sunshine will follow two months' solid rainfall in July and August...
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