Comparing and choosing the right home improvement loans for you needs can be tricky – do you get a secured or unsecured loan for a home improvement?
- Different types of home improvement loans
- How to compare secured loans
- How to compare unsecured loans
- Home improvement loans to increase value
Home improvement loans can help pay for a range of fixes and refurbishments such as a new kitchen or bathroom, or an extension or loft conversion.
Some homeowners might be motivated to make changes in order to increase the property’s value while others may want to simply freshen things up, create some extra space, or achieve a bit of both.
When it comes to financing home improvements, consumers should assess the pros and cons of taking out a secured or unsecured loan, to make sure they’re getting the best deal for them.
Secured loans are loans secured against your property, which means that the bank or building society providing it can repossess your home if you fail to meet the repayments schedule.
Meanwhile, unsecured, or personal loans depend far more on your personal circumstances, but offer a more narrow timeframe for repayments and, usually, less money.
Interest rates on secured loans can depend on the value of your equity, or simply the value of any outstanding mortgage you have subtracted from the property’s value.
Calculating your equity can be simple: for example, if your outstanding mortgage is £150,000 and your property value is £175,000, then your equity is worth £25,000.
The interest rate can also be affected by the length of the secured loan’s term, which is essentially the time period to make your debt repayments in, as agreed with the loan provider.
Secured loan plans generally provide homeowners with longer terms than an unsecured loan policy might. This can allow you, for example, to repay the debt over 15 to 20 years, as opposed to five or ten.
Another factor that could impact the amount of interest you repay is the size of the secured loan. Some banks and building societies offer secured loans of up to £200,000, so property owners with major home improvements in mind tend to opt for a secured loan rather than an unsecured loan, but this also depends on other circumstances.
It’s also important to note that secured loans are only offered to those still paying off their mortgage, so if you own your property outright, then you may wish to consider applying for a mortgage or first charge loan.
An unsecured loan is generally your best bet for home improvements, but it’s worth comparing secured loans to see if you can get a better rate
Your credit score may also be a factor, but it’s less likely to be as much of a concern as it is with an unsecured loan. This is because your property is used to leverage the loan, meaning the provider can repossess your home if you fail to meet the repayment deadlines.
Unlike a secured loan, the amount of money and length of term offered with an unsecured loan is far smaller, but there are some advantages to consider.
Firstly, an unsecured loan doesn’t put your home at risk, although that doesn’t mean the loan provider will not take serious measures against failure to meet repayment deadlines.
Secondly, the time it takes to process the application for an unsecured loan is usually shorter than with a secured loan, meaning you could have the money within days rather than weeks.
If you’re looking to make small improvements or take on a reasonably manageable project in the home, then unsecured loans, which can provide funds up to £25,000 could be more suitable.
However, interest rates tend to be higher with unsecured loans, as it focuses more on the personal circumstances of the homeowner.
A secured loan can be easier to successfully apply for if you suffer from bad credit or have had past problems, but using your property to secure a loan is a serious decision to make, so it’s important to think about whether or not you can keep up with repayments to avoid having your home repossessed.
If you are looking to use a home improvement loan to hopefully increase the value of your home you will need to extend your research to the property market in your area and the general trends in house prices.
You will also need to assess how much value your home improvement could add, and decide whether the cost as well as the potential mess and chaos in your home for a period of time would be worth the value it would add in the long run.
For instance, paying £10,000 for a new modern kitchen, which would, in theory, replace old surfaces and fixtures as well as worn out appliances, would not only set you back in £10,000 but also the cost of interest you’ll have to pay to the loan provider.
Your kitchen is also likely to be out of use for up to a month. So if you are doing it to increase the value of your home, how much would a new kitchen add?
In reality, it may only add £10,000, but it depends on other factors. Your home may be in a desirable location and the property prices in your area might be consistently rising, but the only thing holding back your home was a barely functioning and unattractive kitchen.
In such a case, the home improvement could add significant value to your home. Similarly with more bold home improvements such as an extension or loft conversion, the amount of value added is unlikely to be significantly higher than what it cost you to have it done in the first place.
Ultimately, increasing the value of your home with a home improvement loan comes down to your property’s circumstances, the property market and how much of an improvement you can make to the aesthetics and functionality of your home.
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