Planning a home renovation can be exciting, but it can also come with a big price tag. Whether you're upgrading your kitchen, extending your house, or adding a new bathroom, you might need some financial help to make it happen. A home improvement loan can provide the funds you need, but figuring out which option is best for your situation can be tricky.
In this blog, we’ll explore the different ways you can finance your renovation project and how to get the right loan for your needs.
Types of home improvement loans
There are several options you could use to finance a home improvement project, each with its own set of benefits and risks. The right option for you will depend on your financial situation and the size of your project.
Unsecured Loans
An unsecured loan is a personal loan that doesn't require collateral or security. This means you won’t need to offer your home as security to borrow the money. Because of this, they typically come with higher interest rates compared to some other loans. They are often best suited for smaller sized projects.
One of the advantages is that it’s less risky for you as a borrower, because you don’t have to worry about losing your home if you miss payments. However, because the lender has nothing to fall back on, they may offer you a higher interest rate, especially if you have a lower credit score.
Secured Loans
A secured loan is a loan that uses your home as security. These loans typically come with lower interest rates than unsecured loans because the lender has less risk, since they can seize your home if you default on the loan.
With a secured loan, the repayment terms are often more flexible and loan sizes can be much larger. However, the major downside is the risk to your property. If you fail to make the repayments, the lender can legally take possession of your home to recover the debt. Because of the risk involved, it’s important to ensure you can comfortably afford the loan before committing.
Further Advance
A further advance is extra borrowing you can get from your current mortgage lender. So, if you’ve built up equity in your home over time, a further advance allows you to borrow more money on top of your existing mortgage.
This option is often used by homeowners who want to borrow more money for renovations but prefer to stay with the same lender. It can be an option if you need a good sum of money and are comfortable increasing your existing mortgage balance.
Remortgage
A remortgage is the process of switching your current mortgage to a new lender, which can often be done to release additional funds. This can be a smart option if you are coming to the end of your current deal and would be looking at your options. If you’re considering a remortgage, it’s important to shop around and compare rates from different lenders.
Steps to get a home improvement loan
Now that you’re familiar with the different loan options available, here are the steps to take when applying for a home improvement loan:
1. Assess your financial situation
Before applying for any loan, it’s essential to assess your finances. Check your credit score, current debts, and your income. Knowing your credit score will give you a better idea of the interest rates you may need to pay. If you have a higher credit score, you’ll likely qualify for lower rates.
2. Work out the cost of your project
Estimate how much your home improvement project will cost. Get quotes from any builders you may be using and get a sense of material costs. Don’t forget to include costs for any permits, inspections, and unexpected expenses. Having a clear idea of the total cost will help you determine how much you need to borrow and which type of loan is most appropriate.
3. Research lenders
Once you know how much you need to borrow, start researching lenders to find the best deal. Look for competitive interest rates, flexible repayment terms, and low fees. Using a broker can be helpful at this stage, as they will have access to lots of different lenders, so they can do the work for you.
4. Check eligibility
Lenders will have different eligibility requirements, such as a minimum credit score or income level. They will also want to know the value of your property if you’re applying for a secured loan, further advance, or remortgage. Be prepared to provide documentation like proof of income, and information about your debts.
5. Apply for the loan
Once you’ve chosen a lender and loan type, it’s time to apply. The application process will require you to provide personal and financial information, so make sure you have this ready. For secured loans, the lender may need to carry out a valuation of your property to determine how much they’re willing to lend.
6. Review loan terms
Before signing any loan agreement, make sure you fully understand the terms. Pay attention to the interest rate, repayment schedule, and any associated fees. Once you are happy, you can sign the agreement and proceed to getting your funds.
Summary
Getting a home improvement loan is a way to fund your renovation project, but it’s important to choose the right loan for your needs. Whether you go for an unsecured loan, secured loan, further advance, or remortgage, each option has its pros and cons. By assessing your financial situation, comparing loan offers, and carefully reviewing the terms, you can find the right loan to help you achieve your home improvement goals.
Loans are secured against property - Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
