We’ve all heard the old saying “making your house a home” and making improvements to your home is somewhat a national hobby. However, raising the money can be very complicated, which is where we step in.
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Why consider a secured loan for home improvements?
A secured loan is a way of raising finance using your property as collateral without needing to change your existing mortgage plus options can be available which are not easily obtained through other finance sources.
Benefits of a secured loan for home improvements
- You could borrow more and over a longer term than unsecured finance
- Lower rates than most comparable unsecured loans
- Flexible criteria may help people declined for a remortgage
- Many credit profiles considered – including arrears, CCJ’s, defaults and IVA’s.
- Good for people with complex income scenarios such as self employed and contractors
- You could borrow up to 100% of your property value (in some cases 125%).
- You could consolidate other credit at the same time with options to pay off loans early or pay extra per month to clear the loan sooner.
Various property types are accepted which can also give you more options:
- Standard construction houses
- Some properties on the defective housing list
- Ex-council – including high rise flats
- Shared ownership – borrowing against your share
- Buy to Let property and HMO’s – privately owned or owned by a limited company
- Commercial property
- Properties which are part way through a major refurbishment – maybe with no bathroom or kitchen
Using the equity in your home
Just like a mortgage, a secured loan allows you to borrow against the equity in your home. Equity is the difference between what you owe on your mortgage and the value of the property on the market today (not when you purchased it). For example if you owe £100,000 on your mortgage and your property today is worth £200,000 then you have £100,000 in equity which can be used to raise additional finance when you remortgage.
Secured loan lenders are available to borrow up to 125% of the value of your property – that’s 25% more than it’s worth – although the rates are higher as the lender is taking a greater risk. More competitive rates are available to borrowers who borrow up to 85% of their property value with the lowest rates for those borrowing up to 65% of the property value.
When might a secured loan not be right for you?
- Your home is used as collateral just like your mortgage so carry’s similar risks of repossession if you can’t keep up the repayments – you need to be comfortable with this and your Promise adviser will work out if the loan is affordable for you now and help you consider the longer term risks.
- You might get a remortgage or further advance from your mortgage lender cheaper. However check that your mortgage rate won’t rise as it may be more cost effective to keep the existing mortgage and just borrow the extra amount with a secured loan
- Secured Loans can normally be arranged far quicker than a remortgage but sometimes you need the money really fast. Unsecured loans are often the fastest way to raise a smaller amount of money in days rather than weeks. However you need to consider any difference in cost and risks.
Promise Money has one of the largest lender panels in the UK so we can cater for a vast amount of scenarios. Speak to an adviser or underwriter on 01902 585020 to discuss your requirements.
Alternatives to a secured home improvement loans
An alternative to a secured loan is a remortgage. A remortgage is when you change your mortgage product to a different one and use the money raised to pay off the first mortgage. You can also raise additional finance through remortgaging depending on the equity you have available but typically remortgage lenders are more fussy about who they lend to. Similar to a secured loan, a remortgage is secured on property which may be at risk if you fail to keep up repayments.
A further advance is when you use the equity in the property to ask your current mortgage lender to advance you more money without switching product. Normally the rates are not the same as your existing mortgage so it pays to compare them with a secured loan. Again the money is secured against the property which is used as collateral.
Another option is an unsecured loan. These loans are not secured on your property so your house is not at risk if you don’t keep up repayments.
Benefits of unsecured finance include:
- Speed – it is very quick to set up an unsecured loan so is ideal if the finance is needed urgently.
- Normally cheaper to arrange as there is no valuation or arrangement fees.
- Available to non-homeowners.
There are also some drawbacks however:
- Shorter terms could mean the loan isn’t as affordable.
- Smaller loan amounts – as there is nothing offered as collateral lenders will be less willing to give large amounts – most unsecured loans are up to a maximum of £15,000 which could mean that you have a shortfall in your budget.
- Often a higher interest rate unless your credit score is very high.
- Very dependent on credit history. Most lenders will be unwilling to lend if you have had credit issues in the past
Other points to consider
When applying for any finance you will go through various affordability checks to see if you can afford it. For most unsecured lenders a check on credit score is usually all that is required but for secured finance the affordability checks are far more in depth which helps protect you from taking on a loan you can’t afford.
Due to new regulatory requirements, lenders offering secured loans have to do a full assessment of your income and expenditure to see how much disposable income you have left once all of your regular bills have been paid. They will also make some assumptions about possible increases in interest rates to determine if you can afford the loan at current rates and if rates should rise.
Whilst using unsecured loans and credit cards may be easier and quicker a properly structured secured loan may leave you with more affordable payments in the long term and help you avoid credit difficulties in the future. If you already have unsecured debt you can also consider paying this off with your new secured loan to reduce your outgoings further.
Another key area to consider when planning your home improvements is planning permission. Planning permission is required for many large refurbishment projects including adding extensions and rebuilding/demolition work. The Gov.uk website has more information on what work requires planning permission. Always check if your work requires permission and that you do have it in place to avoid problems such as enforcement notices further down the line.
Another important area to consider is how your home improvements could affect your home insurance. Both your building and contents insurance may need to be updated depending on the improvements to make sure you cover is sufficient in the future.
Who to do your home improvements
There are numerous home improvement companies available and often you might use your local builder.
Here are some links to some of the UK’s best known home improvement companies: