How to fund renovations with a home improvement loan

Planning to improve, rather than move? Look at taking out a loan to pay for the work

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For many people, financial priorities have changed over the past year.

As Covid caused chaos to many of our lives in 2020, lots of households revised their spending intentions.

Amid ongoing uncertainty, some of those who might have been planning to move home are now looking to invest in home improvements instead.

This might be with the aim of extending living space, or to improve existing living space – in a bid to create a better ‘working-from-home’ environment. Whatever the reason, it’s likely to be with the hope of adding value.

If you are looking to carry out some work in the coming months and wondering how to afford it, a loan might be the answer, as this can be a simple and affordable way to spread the cost.

Here we take a closer look.

What is an unsecured home improvement loan?

This type of loan is a personal loan, but one which you plan to use to fund home renovations, such as a new kitchen, a loft conversion – or to build an extension.

As part of the online application process, you will need to specify the reason you are taking out the loan.

(Other reasons to take out a personal loan could include debt consolidation, paying for a holiday, meeting the cost of a wedding, or buying a new car).

While a lender may take the ‘purpose’ into consideration when making their lending decision, once you’ve been accepted, a ‘home improvement loan’ will work just the same way as any other personal loan.

How does an unsecured home improvement loan work?

With one of these loans, you borrow a fixed amount over a set period of time (the ‘loan term’) – at a fixed rate.

From the outset, you’ll know how much you’ll have to repay each month – and for how long.

Equally, as personal loans are unsecured, your home is not at risk (as it would be with a secured loan where your property may be repossessed if you don’t keep up with repayments).

How much can I borrow?

Generally speaking, with an unsecured home improvement loan, you will be able to borrow between £5,000 and £15,000. That said, some lenders may be willing to lend as much as £25,000.

When deciding how much to borrow, it’s worth bearing in mind that larger loans tend to come with lower rates than smaller loans.

That said, you shouldn’t look to borrow more than you actually need, as taking out any loan is a big financial commitment.

How much and what rate you will be offered will depend on your individual circumstances.

What term can I expect?

An unsecured personal loan can be taken over a term up to 25 years.

While a longer term of more than 15 years means lower monthly payments, you could end up paying more interest overall.

By contrast, a shorter term of between one and 10 years will mean you pay less in interest.

With this in mind, you should aim to take out your loan over the shortest period you can comfortably afford.

What rates can I expect?

Right now, there are some very competitive rates available on unsecured personal loans.

For a loan of £10,000 over five years, you may be able to get rates as low as 3%.

You can compare a wide range of loans here.

Will I get the rate advertised?

When it comes to unsecured home improvement loans, you may have seen some rock-bottom headline rates.

But what you need to realise is that with a representative annual percentage rate (APR), only 51% of successful applicants will actually be given the advertised interest rate.

Those who get accepted will be those with uber-squeaky clean credit records, and the highest credit scores.

This is because without having your home or another high-value item as security (as they would with a secured loan), a lender needs to be confident you’ll be able to pay the money back.

What about the remainder of borrowers?

The other 49% of applicants will get a higher rate, based on their personal circumstances.

This could mean you end up facing a much higher rate on your home improvements loan than you’d first anticipated. You need to be prepared for this.

When you compare loans through us, and you see a Guaranteed Rate, you know that if you’re accepted, you’ll definitely get the deal you see. The loan amount, duration and interest rate are all guaranteed, subject to the lender’s final checks.

Carry out a soft search to protect your credit score

Before applying for an unsecured personal loan, it’s well worth making use of tools that enable you to carry out a ‘soft credit search.’

You can then see the deals you are most likely to get accepted for, without doing any harm to your credit score.

Lenders don’t get to see this information.

We’ll show you your chance of being accepted, as well as the guaranteed rate, so you can weigh up the facts and decide which deal to go for. We’re helping to protect your credit score, by making it less likely you’ll have an application rejected and damage to your file as a result.

If you want to check your credit score prior to making an application, you can do so with our Credit Monitor tool.

What is a secured home improvement loan?

As well as unsecured home improvement loans, it’s also possible to take out ‘secured’ home improvement loans – where your home is the security.

With this type of loan, you may be able to borrow bigger sums, easily more than £15,000, and potentially more than £25,000.

But you need to tread very carefully with this type of borrowing as it is secured against the equity or value of your home. If you fail to keep up with repayments, your home may be repossessed.

Pros of a secured loan

  • Possibility of being able to borrow bigger sums – potentially upwards of £25,000. Though, once again, this will depend on your credit history and circumstances
  • As there is less risk to a lender with a secured loan, you may potentially be able to get lower rates – and longer loan terms
  • You could get the money in your account very quickly

Cons of a secured loan

  • If you’re unable to repay the loan, the lender can take the money you owe from the equity you’ve built up in your property
  • You could end up losing the roof over your head

What are the alternatives?

Aside from secured and unsecured home loans, here are some other ways you could potentially fund your home improvements:

  • A credit card – if you’re looking to borrow a smaller amount, you may better off with a credit card, provided you can get a big enough credit limit. Look for a card with a lengthy 0% period for new purchases. But make sure you clear your balance before this introductory deal expires, as interest rates could then soar.

Representative example:If you spend £1,200 at a purchase rate of 21.9% (variable) p.a. your representative APR is 21.9% APR (variable)

  • Further advance on your mortgage – another option involves you speaking to your mortgage lender for a ‘further advance.’ This is an additional loan with your existing lender. As you are not applying for a new deal, this finance should be relatively quick and easy to arrange. But it depends whether or not your lender is willing to allow this.
  • Remortgage to renovate – a further option involves you remortgaging to release some equity to carry out home improvements. You could either take out a new deal with your existing lender, or a new deal with a different lender. But this could take time to arrange, and you need to be able to demonstrate you can keep up with repayments for the bigger loan. Equally, if your mortgage still has some time to run, and you are tied in by early repayment charges, this is unlikely to be the best option.

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