Tim Leonard
Whether it’s a new kitchen, an extension or general maintenance that you have in mind, home improvements can prove expensive.
One option if you have enough equity in your home is to remortgage to pay for the improvements you wish to make. Here’s how remortgaging to renovate works, what to be aware of, and some alternatives to think about before taking the plunge.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it
How remortgaging for home improvements works
Remortgaging is when you switch your current mortgage deal for another. And if you need to raise some funds, either for home improvements or something else, you may be able to remortgage and release some of the equity from your home at the same time.
When remortgaging for home improvements, you ask to borrow a mortgage amount which covers your outstanding mortgage balance plus the amount you need to pay for your renovations. You may be able to remortgage with the same lender or better deals may be offered by other providers.
» MORE: How to remortgage to release equity
Can I remortgage to pay for home improvements?
Whether remortgaging to fund home improvements is a viable option for you depends on several factors.
How much equity is in your home
The more equity that you own in your property, the more you may be able to borrow. To get a rough idea of the house equity you have available, subtract the amount you have left to pay on your mortgage from the current value of your home. The amount of equity you have builds up as you pay more off your mortgage or if the value of your property rises.
Your loan-to-value
Your loan-to-value (LTV) ratio helps determine the mortgage rates you can get. To calculate your LTV, divide the total amount you want to borrow by the current value of your property. Generally, a lower LTV will give you access to better mortgage rates. But if you’re borrowing more, you could move to a higher LTV bracket, where rates may be higher.
Can you afford a bigger mortgage?
A mortgage lender will only offer you a mortgage if it is confident that you’ll be able to pay it back. Because you’re borrowing more, your monthly repayments will rise, unless you remortgage to a lower rate that more than balances this out.
Whatever your new repayments may be, you’ll need to prove to the lender you can afford them. You must also be comfortable in yourself that you’re not overstretching your finances.
How much will the work cost?
As part of the application process, you should expect lenders to ask about the nature of the home improvements you want to make and how much they are likely to cost.
Depending on the scale of the project, you may need to provide details of the plans and share any building estimates you have, so a lender can decide whether it believes what you’re doing is a good idea.
If you want to remortgage for an extension, there may be costs for architects and planning permission to include too. There is also the possibility of needing extra funds as a contingency if things don’t completely go to plan.
Your personal situation
Your income, outgoings, outstanding debts and credit score will all be looked at if you’re remortgaging and borrowing more. Whether you’re self-employed, or have recently changed or lost your job can affect a lender’s willingness to offer a mortgage, and how much, too. There may also be a maximum age by which time you must have paid off your mortgage.
» MORE: How remortgaging works
Should I remortgage to fund home improvements?
There are potential advantages of remortgaging to fund renovations but also reasons why it isn’t a decision to be taken lightly either.
Pros of remortgaging for home improvements
Some of the main benefits of choosing to remortgage to pay for home improvements include:
- It allows you to make use of the equity built up in your property to improve your home.
- The improvements could increase the value of your home by more than the cost of the work.
- You may be able to remortgage to a new deal with a lower interest rate than what you’re paying.
- You could switch to a mortgage more suited to your needs, for instance, if you want the flexibility to make overpayments on your mortgage.
- You can raise funds and improve your home while avoiding the upheaval and expense of having to move.
Cons of remortgaging for home improvement
Some of the potential disadvantages of remortgaging for home improvements include:
- You’re making your mortgage larger, which may take longer to pay off.
- You’ll pay interest on the amount you borrow for the duration of your mortgage.
- Your monthly repayments could rise. For example, you may borrow more money or your new mortgage rate could be higher than what you’ve been paying.
- There are likely to be remortgage costs and fees to pay for your new mortgage deal.
- It’s not guaranteed you’ll be offered a mortgage or the amount you need to borrow.
- There could be hefty early repayment charges if you’re leaving your current deal early.
- Borrowing more could put a strain on your finances, either now or in the future.
- It’s not certain that your outlay will result in a similar or larger rise in the value of your property.
- Applying for and getting a new mortgage can be a lengthy process.
» MORE: How long does a remortgage take?
Is it a good idea to remortgage for home improvements?
A major consideration before remortgaging for home improvements has to be the fact that you’re borrowing more and adding to your mortgage. Potential benefits include the ability to raise funds without needing to move home and the potential to add value to your property. Seeking mortgage advice is sensible to make sure you’re doing the right thing.
When might remortgaging for home improvements be a bad idea?
There are certain times when even more thought than usual may be necessary before remortgaging to fund home improvements.
Early repayment charges are payable
If you’re still in the initial deal period on your current mortgage, there may be early repayment charges to pay for exiting your existing deal early.
These are typically calculated as a percentage of your outstanding mortgage balance – perhaps up to 5% – so there’s the potential for the charge to run into several thousands of pounds. If your renovation plans can be timed to avoid early repayment charges, the savings can be huge.
» MORE: When can you remortgage?
You have little equity
If you’ve only been on the property ladder a few years, or house prices have dropped, you may not have a lot of equity in your property. This could affect your chances of borrowing more, and if you are allowed, the mortgage rates you’re offered may not be cheap.
» MORE: See the latest UK house prices
Your finances are tight
Making sure you don’t overextend yourself financially is a must, particularly if money is tight already.
If your monthly repayments are going to rise, will this affect your ability to save, cover emergency bills, or pay for the nice-to-haves you’re used to? Also think about whether your family or employment situation could change, potentially making it difficult to afford a bigger mortgage in the future.
You’re speculating to accumulate
If your primary aim of renovating is to add value to your home, it’s important to think carefully about your plans and how you may be affected if this doesn’t happen. There are no guarantees that your property value will rise or that you’ll even recoup the money you spend, particularly in the short term.
You may see the benefit in a larger living room or converting a bedroom to an office, but others may not. Do your research, and consider whether the project is likely to be worthwhile.
Alternative ways to pay for home improvements
Before settling on remortgaging to pay for your renovations, it’s important to weigh up the potential alternatives, in case there’s a better and potentially cheaper solution.
Taking out a loan
There are two types of home improvement loan you could consider.
Unsecured personal loan
Personal loans can be available for up to £25,000, or perhaps more, and often charge higher interest rates than mortgages. However, as a personal loan can be repaid over a shorter length of time, and there are typically fewer charges, it can work out cheaper than remortgaging. The process of securing the funds may be more straightforward too.
Secured loans
With a secured loan, you must put forward an asset as security for the loan. Typically, this will be your home, explaining why these are sometimes referred to as homeowner loans or second charge mortgages.
Because the lender has security to fall back, interest rates on secured loans are sometimes lower than on unsecured personal loans, and you may be able to borrow larger amounts. The main downside is that your home is at direct risk of repossession if you don’t keep up with your repayments.
Further advance
If you don’t want to remortgage for home improvements, it may still be possible to get a further advance on your existing mortgage from your current lender.
The rate could be different to the one you pay on your current deal, but you may save on the fees payable for taking out an entirely new mortgage. This option may also mean you can keep the rate you’re paying for your main mortgage, which could be a good option if rates in the wider market have increased.
Credit card
If your renovations come to a smaller sum, a credit card that charges 0% interest on purchases could be worth considering. However, as the interest rates charged once the interest-free period ends will be high, it’s vital you pay off what you borrow within the one or two years that the introductory rate lasts.
Save up
In an ideal world, you wouldn’t need to borrow at all and could save up to pay for the improvements you wish to make. It may take patience to build up your savings pot and discipline not to spend it on something else. But if your renovations aren’t urgent, opening a savings account is worth considering.
Equity release
Equity release may be worth considering as an alternative to remortgaging if you’re aged 55 and over. Using a lifetime mortgage, it’s possible to release equity from your property as lump sums or as a regular income.
Repayments only need to be made when you either move into long-term care or pass away, but be aware that interest can quickly accumulate. This may mean you’ll have little or even no inheritance to pass on.
» MORE: Is equity release or remortgaging right for you?
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