Should you Remortgage to Renovate your House

There are many reasons to invest in home improvements, aside from boosting the value of your property or giving your family more space. You may want to construct the kitchen of your dreams, or want an extra bathroom.

But how do you finance it? Should you remortgage to renovate your house or look at other financing options? We spoke to finance expert Dan Stevens to find out.

If you are in a situation where your home is simply not big enough or falling apart then you might not have a choice. But if it’s simply a case of renovating or remodelling because you want to for purely aesthetic reasons or because a neighbour release equity and now have a better house. But if you don’t have the funds in savings you should seriously consider the value increase of the work.

You may have the option to borrow money by remortgaging or by obtaining a new mortgage from a different lender to fund home improvements. Thinking carefully and seeking independent financial advice before making a choice may help you find impartial financial advice, which will increase the cost of your repayments and burden you with increased monthly repayments.

And to top if off, you need to factor in any early payment fees plus the interest increase for the extra money. The key factor here is rising interest rates, long-term stability and how the home improvements can improve the value of the property in time. You should also look at your current mortgage as your existing lender maybe releasing equity without changing anything but the value and monthly repayments.

Now lets hope you are coming to the end of the current mortgage term and you looking to fix for longer term and equity release to cover the costs of some home improvements.

What is Remortgaging?

A mortgage is a secured loan on your flat or house. Remortgaging is extending your mortgage with your current lender (which usually doesn’t require a long financial application and proof of identity and finances), or moving your existing mortgage deal from one lender to another (where you would need to provide all documents including fees, conveyancing costs, property valuation costs, early repayment charge, and exit fees)

Usual reasons include:

• Coming to the end of your existing rate and to fix before interest rates rise further
• Looking for a better deal than your current one (which is unlikely currently)
• Planning to borrow more money against your property to renovate or a high-value purchase
• Getting a longer fixed rate before they increase further

So let’s hypothesize that we are looking at a stunning new bathroom, which has a complete renovation price of £15,000. If you want to remortgage for home improvements to get the money, you will receive a new mortgage agreement with a new lender. Furthermore, you may be able to borrow more money as part of this arrangement based on the house value, LTV and deposit amount.

For instance, if you have a £240,000 mortgage and want to renovate the bathroom for around £15,000, you may take out a £255,000 mortgage, pay the old mortgage off and use £15,000 to renovate the bathroom.

The importance of working out affordability on a mortgage calculator

So to be fully clear; when you take out a new mortgage, you’re obligated to repay the borrowed money plus interest throughout the duration of loan. Even for remortgaging you should be using a mortgage calculator service to ensure you can cover all monthly repayments or your property could be at risk.

Borrow More with your Mortgage

You may be able to get more money if you already have good interest rates or if you want to keep your current mortgage provider. This might be dependent on how much of your mortgage you’ve already paid off or the value of your property if it has risen significantly.

It’s important to understand that the interest rate on the additional money borrowed may be different, and as with refinancing, it will be secured against your house.

Is it Cheaper to Remortgage?

It may be cheaper to add the expense of home improvements to your mortgage rather than taking out a personal loan or using a credit card.

The lowest rates on remortgaging are usually around 3% to 4% (you should speak to an experienced mortgage broker to get the best rates), but the rates on personal loans are also quite low currently but need to be paid of quicker. In addition, you can repay the entire loan amount throughout your mortgage rather than the three- or five-year term common on personal loans. The level of funding you will receive when you remortgage depends on the loan-to-value ratio you will be borrowing at.

Things to Think About Before Mortgaging to Pay for Home Renovations

1. More money would be owed in your mortgage

It’s not a big deal right now if you have a mortgage and owe more than your property is worth, but you should consider the long-term effects as well.

A reduced income for any reason – job loss, reduced working hours, a new family, for example – may make it difficult for you to maintain bigger mortgage payments. When considering taking out a loan, take into account how this will affect the amount you owe to your mortgage lender. You will repay interest on the amount you borrow in addition to the capital, so don’t overborrow.

2. Your finances will be stretched

A large proportion of loan-to-value mortgages (for example 90% or 95%) means that a couple of years’ worth of repayments hasn’t made a substantial dent into the balance or given you much equity.

You may have difficulty borrowing more when remortgaging or you will be pushed onto a more expensive rate. In these situations, it would be best to wait a while or seek other ways of funding your renovations.

3. Charges to early repayments

It may be important to avoid early repayment charges when you’re remortgaging, but they aren’t a trivial fee. In many instances, being able to avoid a current mortgage deal might mean that you don’t have to pay one. Carefully read your mortgage agreement to ensure you aren’t tied to it.

4. Renovate for the correct reasons

Updating your house before putting it on the market is not a smart idea. You might end up spending more on repairs than what they are worth. The smartest way around this is to consider what types of upgrades are most worth the effort.

Converting a garage into a functional space, converting cellars into liveable spaces or updating a bathroom are all good ways to improve the value of a home. Minor repairs to the house’s exterior can help improve its value. Before undertaking major structural work, research the market or seek advice.

5. You’re locked into a long-term fix

It can be costly to switch mortgage deals mid-term, so it’s best to finish your fixed term and then switch. For example, you may find that you must pay a lot of money if you want to repay early.

The longer you have the deal, the less these charges are, but they can still amount to as much as 5% of the mortgage balance in the first year. If you’re looking to look for other options then you should contact your lender to ask whether it can give you an additional sum.

You must carefully consider alternatives before taking out any extra borrowing, as the rate may not be the same as the rest of your mortgage.

Remortgaging Alternatives

You may be able to borrow money for renovations by remortgaging or by using other methods, provided the renovations are substantial enough.

Savings

The safest choice is always to use your savings. There is one obvious disadvantage – you will have to wait until you have enough in your account to pay for the work. Even if your improvements are not urgent, saving tightly for a few months can make a huge difference.

Credit Card

A credit card might be a good choice if you want to make some minor home improvements. However, this might not be the case if you are planning a large renovation. A regular credit card usually has a short interest-free period, but it might not be long enough.

Avoiding interest payments for up to 12 months is possible with an interest-free credit card.

Personal Loan

You can use a personal loan to pay for renovations and anyone earning money can apply for a home improvement loan on 3% APR over 60 months at the time of writing. You will repay a set amount of money for an agreed period, plus interest, in monthly instalments. Ensure that you can afford the monthly payments on your loan without difficulty before you take one out.

What home improvements add value to your home?

This should play a big part in your thinking as Loan to Vale (LTV) will always be a factor is getting the best rates. In short, extra rooms and extensions make a big difference and some don’t even need planning permission. These appeal to any potential home buyer, although you should also make your house into a home you want to live in. Options include:

• Converting cellar into playroom or home office
• Convert your garage into a living space, playroom or home office
• Loft conversion into bedroom with en suite
• New Kitchen
• Conservatory or glass room
• Modern bathroom suites
• Open Plan living area
• Improved energy options including insulation, renewable energy sources, and heat pumps
• Garden and patio make-over