Should I remortgage to refurbish my home?
If you’re dreaming of transforming your home with a new kitchen or extension, you’re not alone. A recent survey showed that UK homeowners spent £295 billion renovating their homes over the last five years. But how should you fund expensive refurbishment projects?
Mortgage expert Michael Usher, of Michael Usher Mortgage Services, discusses the options
Our appetite for home improvements shows no sign of slowing. Whether it’s a new open- plan kitchen, a sparkling bathroom or a loft conversion, many homeowners are opting to improve or extend their existing property rather than up sticks and move.
It’s likely that ongoing uncertainty over Brexit alongside the rise in moving costs are helping to fuel this refurb trend; many of us would rather make the most of what we have than risk the upheaval of moving.
But renovations can be eye-wateringly expensive. A new kitchen typically costs between £10,000 and £25,000 if you hire professionals to design and install (if you’re lucky enough to have a DIY expert or builder in the family, these costs can be slashed considerably). The good news, however, is that this short-term outlay can reap future dividends. A survey by Post Office Money this year showed that home improvements can add around £40,000 to the value of a property. If you live in the south east or other UK property hot spots, that figure could be even higher. So renovations aren’t just something to enjoy while living in your property - they can be a sound investment for the future.
How should I fund my house project?
While some careful homeowners might have managed to build up a pot of savings to fund their projects, many will need to borrow the capital. There are various different options - among the most common are personal loans, credit card loans and remortgaging.
Opting for a personal loan from a reputable lender is a popular choice, and with interest rates still low this can be cost-effective. The
loan is likely to have a fixed interest rate over a defined term, most commonly three to five years. If you’re borrowing a large amount, however, the monthly repayments can be high. For example, a £25,000 personal loan over five years at a rate of 2.9% will cost around £448.00 in monthly repayments.
Raising capital for a lower-cost refurb? A credit card might be all you need to fund a project of around £5,000 or less. Many credit cards have 0% introductory rates, which means you can borrow money without paying back any interest, typically for a term of 12 months. But a word of warning - once that introductory term has passed, interest rates will kick in and can be as high as 39.9% APR (the annual cost of the loan, including interest and charges). For a credit card loan to be cost-effective, you should be absolutely confident of making the regular monthly payments, and try to repay the loan as quickly as you can.
Remortgaging essentially refers to the process of borrowing money against your existing property. For example, you might have a mortgage of £125,000 but would like an extra £25,000 to fund a garden office. In this scenario, you could: • Ask your existing lender to increase the size of your mortgage.
• Transfer your whole mortgage – plus the extra amount – to a brand new lender.
• Leave your existing mortgage as it is and take out a second mortgage (also known as a secured charge loan).
There are pros and cons to each of these three
remortgaging approaches. Depending on the lender’s interest rate and terms offered, it’s impossible to recommend a ‘one size fits solution.
As a general rule, remortgaging offers lower monthly repayments over a longer term than you’d typically find with a personal loan or credit card loan. For example, borrowing an extra £25,000 over 15 years at an interest rate of 2.9% would mean monthly repayments of around £171.
There are numerous variables that could affect your remortgage decision. These include whether or not your current deal charges an early repayment fee or exit fee, and whether you would like a deal that offers flexible terms such as payment ‘holidays’. It's wise to consult a mortgage adviser in order to get a fully- rounded picture of every option. In the best case scenario, switching to a better deal with a lower interest rate could massively offset the cost of your extra borrowing.
Planning a dream design? Do your homework
Renovating or extending your home can undoubtedly add value – not just in terms of enjoyment while you’re living there, but also the financial value of your home should you decide to sell. But before you go ahead, it’s crucial to do your homework. Speak to an estate agent to get a view on the potential uplift in your house value. Not all ‘improvements’ turn out to be sensible. For example, a huge ground floor extension that results in a postage-stamp garden might actually reduce the value of a property. With the right advice and creative vision, there’s no reason why your house dreams shouldn’t become a reality in 2020.
New Homes Wales and the South West
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