5 Practical Ways to Get the Money Needed for your Renovation
Despite the fact reality television stars and Premier League footballers would have you believe that your dream house should be a McMansion on a hill or on a beach overlooking the Geordie Shore, the truth is that our homes are places where we have parties, raise our kids, retreat to during the winter and share with our pets. And all these things can result in our little slices of the world needing some tender loving care in the form of a renovation.
With that in mind, we thought we’d have a look at some practical ways to finance your renovation adventure without having to sell a kidney or renting out the spare room to an Australian backpacker.
If you’re lucky enough to be a homeowner chances are you’re also unlucky enough to be the owner of a hefty mortgage and repayments. However, it doesn’t have to all be negative, as an increase in your loan limit has some serious advantages. For a start, it avoids all the hassle of applying for a new standalone loan, meaning you don’t double up on paperwork and forms. Also, if you’ve got a good history of repayments being made on time, you’re not likely to come up against too many objections from your friendly lender to get a small top up, as long as your equity and income are adequate. The other major advantage is that since the repayment interest rate is determined by your existing home loan it is often much cheaper than the interest that credit card companies or other personal loans will hit you with.
These options known as mortgage drawdown facilities, and are related to the top up option, though not the same. Usually a feature of flexible mortgages, drawdown facilities can allow you to ‘reborrow’ some of the capital which you’ve already paid off on your mortgage up to an agreed amount and often not exceeding the original loan amount. If you’re looking to do a home renovation then it’s worth checking your mortgage key facts illustration or your mortgage offer to see if you have some sort of drawdown option available, especially if your credit score has taken a hit since you first borrowed money for your house as, depending on the circumstances, there may be no need for further credit checking when using a drawdown facility. Be sure to double check this criteria with your lender though and also if you do see mention of a drawdown facility, confirm that the feature hasn’t been withdrawn at the lenders discretion before making any firm plans. It’s important to ask questions of your bank regarding these options as there are often very different fees between institutions and lenders regarding drawing out funds that you’ve already contributed to your mortgage, especially when interest rates are low, as they are now.
Second Mortgage or Homeowner Loans
This is a type of finance that can be seen as a shortcut to accessible funds that you’ve earned from your diligent repayments to date. It is essentially a line of credit that uses your home as the physical asset to back it up, much like your original mortgage. So say you’ve paid back 100,000 of your 200,000 mortgage (good work!), your equity will be 100,000. Banks and other lenders will typically lend you percentage of that equity, generally between 60% – 80% taking into account things like your credit history and amount of the loan. Unless major renovations are on the cards it’s unlikely you’ll need to full amount so these are a flexible way to gain the 20,000 – 30,000 you may need. The disadvantages are that these lines of credit basically act as a second mortgage, as they are an extra loan within your existing mortgage.
Be very careful when it comes to getting a homeowner loan or a second mortgage. The thing to remember is that these loans are secured against your property so if you fail to make the repayments you could be forced to sell your home. It would be gutting to have to sell your property because your circumstances have changed and you can no longer meet the repayments on the small second loan, even if you can still handle the repayments your main mortgage.
Loans or Credit Cards
If you are only making small renovations then a taking out an unsecured loan from a company like Zopa could be right for you. You can typically borrow up to £25,000 on an unsecured basis depending on your circumstances. This amount should cover quite a few renovation possibilities. For much smaller renovations it may even be possible to use credit cards to your advantage to borrow the money you need on an interest free basis. Some credit card providers offering balance transfer offers will allow you transfer cash into your bank account for the interest free period instead, paying a one time fee of say 4%. I know that Virgin currently offer this option with an interest free period of 26 months. It’s important that you be diligent in paying the money back though or you could end up paying large amounts of interest at the end of the interest free period.
Probably the one that most people are familiar with, an overdraft is a personal credit line that is basically a credit card. However, the advantage is that it is a loan without a fixed repayment period and time, and you pay back only what is used, rather than a whole loan amount which may go unused. The added flexibility is especially useful if you’re making decisions about your renovation as you move through it, rather than having a master plan at the outset. This can also be accessed much like any funds you have in the bank using debit cards or online which certainly makes paying tradespeople easier. However, because of this flexibility and the fact the credit is unsecured banks are much more hesitant to grant them, and there will generally be lower amounts lent than other options.
The options for securing finance to make renovations happen have to be carefully considered before you take the plunge and start knocking down walls. But at the end of the day, there’s a saying in an old movie that a persons home is their castle, and renovations and improvements are the best way to make sure that you feel like a king or queen in your own home.
Editors notes: Although this article was originally written by our Australian based writer Raj Padarath, I have edited some of the content to make it relevant to the UK market. Some of the credit choices mentioned in the article are riskier or less attractive than others but they are all legitimate options, so I feel they deserved a mention.