What Is A Home Improvement Loan?
A home improvement loan is a way of borrowing money that enables individuals to carry out improvements to their home such as a new kitchen or bathroom.
With more people working from home, there is a trend of creating space for a home office and gym. This allows people to work from a home desk and also maintain a healthy lifestyle.
Many people choose to take out a home improvement to enhance their quality of life and to also add value to their property which is normally their main asset. They would benefit from the additional equity were they to sell their home.
There are several different types of home improvement loan including a personal unsecured loan, a further advance from your existing lender, a second mortgage or a remortgage.
Can You Get A Home Improvement Loan Added To A Mortgage?
A home improvement loan can be added to a mortgage. One way is to apply for a further advance from your existing mortgage company. This is likely to be the most convenient option in that you would keep the same mortgage lender and borrow the additional amount you require to carry out the required improvements.
Your lender may ask to see up to date evidence of income to show that you will be able to afford a higher repayment as a result of the additional borrowing. In addition, they may want to carry out a new valuation of the property for them to confirm there is sufficient equity for them to be able to lend.
If you were to look at other options such as remortgaging, you may incur significant setting up costs such as an arrangement fee, legal fees and the cost of a valuation. However, it may be beneficial to get a mortgage broker to research the market to ensure that your current mortgage deal is competitive. If they discover that there are other lenders offering considerably lower rates, it may be worth considering a remortgage.
Mortgage companies will always consider the value of your home before the home improvements are taken out. This way they are covered in the event of someone receiving the loan and not carrying out the proposed improvements for whatever reason.
Can I Get Loan With Bad Credit?
While you could get a home improvement loan with bad credit you may be restricted to the amount you can borrow, and the interest rate will be considerably higher than with someone who has clean credit. The lender will consider it more likely that you default on their loan if you have previously defaulted on previous loans.
Unsecured loans or personal loans, tend to be for smaller loan amounts of say £5,000 to £10,000 and usually have a maximum term of 7 years – 10 years.
An unsecured loan might be suitable if you are only looking to borrow a small amount for example to build a porch. In addition, the repayments on a larger loan over say 7 years may be too expensive over such a relatively small loan term. If you were to apply for a loan it would be sensible to consider a fixed rate loan.
Second mortgages, secured loans or homeowner loans would be considered by someone who might be wanting to carry out extensive improvements such as adding an extension to their property and needed to borrow over a longer term of say 25 years in order to keep the repayments to a minimum. Some lenders will lend over 30 years but you have to bear in mind that you will pay back a very large amount of interest if you were to keep the loan for the full term.
Most lenders allow you to make additional capital repayments. This is something that should be recommended as it will result in you paying considerably less interest than if you had kept the loan for the full term.
Second mortgage lenders are normally happy to lend to applicants who may have a poor credit file because they are taking a charge over the applicant’s property and in the event of the borrower not repaying the loan, ultimately the lender will have the right to repossess the property and recoup their monies.
When applying for a secured loan or second mortgage you need to be aware that if you miss repayments on the loan you could lose your home.
How Much Can I Borrow?
The amount someone can borrow for home improvements depends on a few factors.
Someone looking to borrow say a maximum of £25,000 may be considered for an unsecured loan. For this amount they would need a strong credit rating and any lender would look closely to ensure that they could afford the proposed monthly repayments.
A person wanting to borrow to build a double storey extension and requiring say £150,000 would normally need a further advance from their current mortgage company, a second mortgage or a remortgage. The amount that they could borrow would depend largely on the available equity in their property, their credit score and income.
In recent years some lenders have introduced a very flexible type of loan called a HELOC which stands for Home Equity Line of Credit. This works on the basis that the lender agrees an amount that they are prepared to lend you and you can drawdown amounts as and when you require the funds.
One of the highlights of the scheme is that you are only charged interest on the amount you have withdrawn. This works very well with a home improvement loan in that you will not necessarily require all the funds in one go. You can start the project by drawing down an amount to start the first stage and drawdown further monies when needed. The funds will be paid into your bank account each time you drawdown.