Steep house prices in many areas of the UK combined with a limited number of properties for sale mean that many people are opting to improve their homes rather than move.
Improving your home can be a great way to boost its value as well as making it a nicer place to live, but building work can be expensive. If you’re considering making changes to your property, then you’ll need to work out a budget and think about how you’ll cover costs.
Here, we run through a few of the different ways to pay for improvements, along with some of the pros and cons of each.
Paying for improvements using savings
If you have savings readily available, then this is usually the simplest and most effective way to pay for home improvements, as you won’t have to borrow money or pay interest. Make sure you leave yourself with a cash buffer though, in case of any unexpected expenses.
If your savings are tied up in investments or bonds then it might take a bit of time to extract your funds, and you’ll need to consider whether it’s the right time to cash them in. It’s important to remember that investments are for the long term, so if you can use cash savings instead, this is likely to be a better option. You can find out how to make sure your money is working as hard as possible for you in our article Five ways to boost your savings returns.
Paying for improvements with a credit card
Using a credit card can be a good option if you’re buying materials for certain repairs or improvements that fall on the less expensive end of the scale.
One particular advantage to using a credit card is that you will be protected by Section 75 of the Consumer Credit Act. What this means is that if any building materials you buy for your home improvements turn out to be faulty, incomplete or unsatisfactory, or if the company you’re buying them from goes bust or disappears, you’ll be able to claim your money back from your credit card provider. This could be a good reason to consider using a credit card even if you have enough savings to cover the cost straight away, just as it will add an extra layer of consumer protection. Make sure you pay off your balance in full at the end of the month to avoid paying interest on what you owe.
If you think you’ll need a bit more time to clear your balance, you might want to consider using a 0% purchase credit card. Taking over a month to pay off a credit card usually means that you will be charged interest, but many credit card providers offer introductory deals where interest won’t be charged on any purchases for a set number of months. This means you have the freedom to spread out your repayments, as long as you finish paying off the card by the time this 0% period ends.
The longest introductory deals on cards like this tend to last for up to 24 months, so when choosing one, you’ll need to figure out how much your improvements are likely to cost and how long it will take you to repay what you owe. Read more about credit cards in our Simple guide to credit cards.
Paying for improvements with a loan
If you’re expecting your improvements to be a little more costly – say, in the thousands – then you could consider getting out a personal loan.
We regularly update our article Balance transfer credit cards and personal loans compared to show you which lenders currently offer the cheapest interest rates on personal loans between £7,500 and £15,000.
As with a credit card, you should figure out how much your improvements are likely to cost and have a plan in place to make your repayments on time, making sure to take interest into account as well.
Personal loans are usually “unsecured”, meaning you are not offering an asset as collateral, so lenders will decide whether to lend to you purely based on your credit history. Having a good credit score therefore can significantly improve your chances of being approved for a personal loan. Take a look at our article on Seven steps that could improve your credit score if you feel like yours could use a boost.
Paying for improvements with equity release
If your home improvements are likely to be particularly expensive, and you don’t expect to move for a very long time – if at all – you might want to consider equity release.
Equity release allows you to unlock some of your property wealth without having to sell your home. You’ll either be provided with a lump sum or you can choose to draw down funds as and when you need them. The loan and interest usually only have to be repaid when you move into long term care or die and the property is sold, although you may have the option to make repayments if you want to before this point.
However, equity release comes with its downsides. Not only are there fees involved with setting it up, but interest rates tend to be higher than standard mortgage rates, and they are much steeper than they used to be following a series of increases in the Bank of England base rate.
Releasing equity from your home may also affect your entitlement to means-tested benefits and will reduce the value of any inheritance you might have planned to leave.
Depending on which equity release plan you go for, it can be expensive or even impossible to get out of if you change your mind, so you need to be confident that it’s the right option for you. We recommend reading our guide Equity release – what is it and how does it work? for more information.
If you’re looking for somewhere to start, you can get expert advice from a Rest Less Mortgages equity release specialist. They are active members of the ERC and can advise on equity release mortgages from the whole of the market. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
Paying for home improvements with a RIO mortgage
Retirement interest-only mortgages, or RIO mortgages, are a type of mortgage intended to help meet people’s needs in retirement. They enable you to carry on making interest payments indefinitely, with the loan paid back only when you die or move out. For this reason, they are mainly aimed at people in their 50s and 60s, and have been seeing an uptick in popularity recently.
With a RIO mortgage, as the name suggests, you only pay off the interest on your loan. You won’t be able to borrow as much as with a repayment mortgage, but your monthly payments will be much lower.
There is no fixed term to a RIO mortgage; the capital is repaid when your home is sold, when you die or when you move into long-term care. Unlike with standard interest-only mortgages, you aren’t expected to demonstrate how you intend to pay off the capital later on, as it will already be expected that this will come from the proceeds of the sale of the property. All you need to prove is that you can make the interest repayments each month, so you will need a good credit history to qualify.
One advantage RIO mortgages have as an option over equity release or other lifetime mortgage products is that by paying off your interest each month rather than at the end, you avoid your interest charges compounding over time. So, by accepting the monthly interest charges, you (or your beneficiaries) should get to keep more of the gains when the property is eventually sold.
This option is proving increasingly popular, with Hodge Bank recently reporting a 50% increase in the number of applicants taking out a RIO mortgage in order to make home improvements. Bear in mind that lenders tend to require that applicants own at least 40% equity in their home before accepting them for RIO mortgages.
The downsides are similar to that of equity release. You’ll likely end up reducing the amount you’re able to leave as inheritance to your loved ones, because funds from selling the property will be used to pay off capital on the loan. You’ll also have to make those interest repayments every month until you die, so this isn’t a financial decision to take lightly, and you may prefer to remortgage to a standard mortgage to borrow extra cash to fund home improvements instead. Bear in mind, however, that lenders will only agree to this if you can demonstrate that you have sufficient income to keep up with your repayments, both now and in the future.
To find out more about RIO mortgages and how they work, check out our article How retirement interest-only mortgages work.
One last tip if you’re planning on making significant home improvements is to make sure that your home insurance provider is aware of the changes you’re planning. Making major alterations to your home will affect your policy, and you could risk invalidating any future claims if you fail to notify them of the work you’re doing. You may also want to increase your contents cover if you end up buying lots of new things, for example, because you’ve had an extension and need to furnish it.
Find out more about home insurance in our article Your essential guide to home insurance.