Home Improvement

Home improvement loans: What should you consider before getting one?

Items needed for home improvement loans

Some extra cash can help with home improvements. We discuss the pros and cons so you’re in the know.

Home improvements can be expensive and finding the savings to cover the cost isn’t always possible. So, what are the other options?

A home improvement loan can help cover the cost of any building work you do to your home. You can pay this off over a few months or years.

But before you start pricing up your dream kitchen, there are some points to consider.

What is a home improvement loan?

A home improvement loan is a personal loan that you can use for renovations or building work on your home.

Some people opt for a home improvement loan to increase the value of their home.

Others choose a home improvement loan to make more space or give their house a facelift. Sometimes this is a good alternative to selling.

How do home improvement loans work?

You usually apply for a home improvement loan through your bank, credit union, a private business, or a lender.

If your application is approved, the money will go straight into your bank account.

Once you’ve taken out the loan, you’ll have to pay it back over time. Usually in monthly installments. You’ll pay back the cost of the loan, plus the interest rate in Home improvement loans.

The amount of interest depends on:

  1. How much you want to borrow
  2. How quickly you choose to pay it back
  3. Whether it’s a secured or unsecured home improvement loan.

What are secured and unsecured home improvement loans?
There are two main differences between secured and unsecured loans.

Secured loans are ‘secured’ against an asset like your home or your car. That way, if you can’t make the repayments, the lender can recover the money through the asset’s value.

Unsecured loans aren’t secured against anything. But if you can’t make repayments, you could receive a fine and damage your credit rating.

The loan amount is usually smaller than a secured loan too.

Before you decide on a secured or unsecured home improvement loan, you should weigh up the pros and cons of each.

What are the pros and cons of an unsecured home improvement loan or Home improvement loans
PROS CONS
If you take out an unsecured loan, you won’t lose your house or secured asset if you can’t make your monthly installments.

If you don’t make your repayments, you could receive a fine. You could even be taken to court. This will negatively impact your credit rating too.

You may not be able to borrow as much as you could with a secured loan.

Interest rates vary, but they’re likely to be higher on an unsecured loan.

What are the pros and cons of a secured home improvement loan?
PROS CONS
If you secure your loan against your house or car, you may be able to borrow more money.

If you don’t keep up your payments, you could have your home or car repossessed.

You could benefit from better interest rates too.

Missing payments will negatively affect your credit rating.

READ MORE: Unsecured vs secured loans

Why might a home improvement loan a good option for me?
If you have a good credit score, it’s worth considering a home improvement loan. You could benefit from lower interest rates and better deals on borrowing.

You can choose how long you want to take to pay the loan back. This is known as the loan term. Remember to budget for higher interest rates with this option.

Once your application is approved, the loan goes straight into your account. You’re not restricted to spend it on your initial project either, so you can get anything else you need with the cash.

Often you can get more through a loan than a credit card.

What should I consider when taking out a home improvement loan?
You should consider the cost of the building work before you take out the loan.

If it’s expensive, will you be able to budget for the cost of repayments plus interest? Check your outgoings before you take out the loan and

Check your credit score before you apply for your loan. If your score is low you may be rejected from the loan in the first place. See our tips on improving your credit score before you apply.

 

What are the alternatives to a home improvement loan?

Savings

If your building work isn’t urgent you could try building up your savings and using that. That way you avoid the cost of interest.

 

Credit card

Some cards offer a 0% interest rate, which means you can pay off the cost without the added interest.

The interest-free period often only lasts for a certain time, so you’ll need to pay it off before the period ends. And often you can’t borrow as much on a credit card as you can with a loan.

 

Re-mortgage your house

Re-mortgaging means changing your current mortgage provider or changing your mortgage deal with your current lender.

When you re-mortgage, you borrow more money from your new or current lender. You can use the extra money for home improvements. Here’s an example of how this might work:

If your home is worth £200,000 and you’ve already paid £50,000, you have £150,000

If you take out an extra £170,000 with your new or current lender, you could use the extra £20,000 on home improvements.

Consider though, that you’ll be paying your mortgage off over a longer-term – along with interest rates. You could also be charged if you want to pay off the loan early.

Again, if you’re going down this route, make sure you can budget for repayments. You could risk losing your home otherwise.

 

Further mortgage advance

With a further mortgage advance, you borrow more money on top of your mortgage from your lender. A further advance will usually have a different interest rate from your mortgage.

You could benefit from lower interest rates than a loan, and you can borrow over a longer-term.

But if you’re paying it off over a long time you could end up paying more in interest than a personal loan.

Make sure you weigh up your options carefully. A further advance may only be worth it if you can get competitive interest rates.

You could also lose your home if you don’t make your repayments back.

 

Are home improvement loans tax deductible?

Personal loans for home improvement are not tax deductible because they’re not secured by your home. Home equity loans and home equity lines of credit, on the other hand, use your home as collateral for the loan. Because of this, you may be able to deduct the interest paid on a home equity loan or HELOC if the funds were used to “buy, build or substantially improve” the home that was used as collateral.

How much can you borrow with a home improvement loan?

Because home improvements do not use your home as collateral, you’re typically not limited by the amount of equity you have in your home — the amount you can borrow is instead determined by the individual lender. Most lenders offer loan amounts from $1,000 to $50,000, though some let you borrow much more.

Can I borrow more on my mortgage for home improvement?

While it’s not possible to add on to your existing mortgage, you can borrow money for home improvements through what’s known as a cash-out refinance. With a cash-out refinance, you’ll take out a new mortgage for a greater amount than what you currently owe. You’ll then receive the difference in cash, which can be put toward home improvements. Because you’ll be taking out an entirely new mortgage with new terms and a new interest rate, a cash-out refinance is only a wise move if you can get a better interest rate than what you’re paying on your current mortgage.

How to find the best home improvement lender

Using a personal loan for home improvements can be a quick and easy way to increase the livability, curb appeal and value of your home.

Start by shopping for a home improvement personal loan that works best for you. Compare offers from a variety of lenders, such as banks, credit unions and online marketplaces. The best home improvement lenders have:

The lowest rates: Look for lenders that offer the lowest home improvement loan interest rates. Even if your credit score isn’t stellar, look for lenders with a low maximum rate. While borrowers with excellent credit will get the lowest rate, you still want to make sure you aren’t paying more than you need to.
The largest loan amounts: How much can you borrow? If you’re tackling a large renovation, like a new roof, you might need to borrow a significant amount of money. Find a lender that offers as much as you need.
The fewest fees: Sometimes lenders charge an origination fee, a late fee or miscellaneous fees on top of your principal and interest payments. Factor in fees when considering a lender’s offer.
The easiest repayment terms: See how long it’ll take you to repay your loan. Longer repayment periods will lower your monthly payments, which is especially important for borrowers seeking large loans. Some lenders have terms as long as seven or even 12 years, depending on how much you borrow.

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