If you have decided to make a major improvement to your home such as an extension, conservatory or a loft conversion, you will be aware that it is not going to be cheap. In terms of the improving the value of your home, all three of these jobs can add value, so they are a wise move – as long as you can afford it.
For most people it will be a case of taking out some sort of financing to be able to achieve their dreams. However not all finance options are as good as others and it will depend on your long term goals and your ability to pay it back.
This is the most cost effective way to borrow money particularly while mortgage interest rates are so low. If you can simply add the cost of your home improvements onto your mortgage you will have a low interest rate and up to 25 years to pay it back. But there are some pitfalls.
- Your lender may be very cautious about lending more money in the current financial climate.
- You need to have enough equity in your home to more than cover the cost.
- The long term nature of the loan means it may cost you quite a bit in interest over the years.
A personal loan
This type of loan can be secured on your home or unsecured. An unsecured loan is preferable as you will not lose your home if you are unable to pay it off, but there is usually a maximum amount which can be lent on an unsecured basis and this is usually around £20,000. This loan will be more expensive but you can pay it off more quickly to offset these extra costs.
Borrowing from your supplier
This is really a type of personal loan, but you may be able to negotiate a better deal. Your supplier (eg: a conservatory installer) will normally have a relationship with a lender and will work with you to get the money you need. Sometimes you may be able to take advantage of 0% deals which can cut the cost of your lending considerably.
Credit cards and overdrafts
Both of these options are a last resort and should only ever be very short term. You are likely to have a high rate of interest and will be subject to fees if you cannot pay them off. You may be able to get a 0% credit card which will give you a few months to repay the full amount, but you must make sure you pay it off in full at the end of the deal. You may consider these options if you are improving your home before you sell it as you could get the money back within a few months. But don't rely on this.
As with all forms of lending, you need to be very careful that you understand fully what you are signing up to. Work out for yourself what your total amount payable will be and for how long you will be paying off the loan. Check to see how flexible it is and if you could pay it off earlier.
Always see an independent financial advisor before taking out a large loan as they will be able to explain more clearly what the risks and pitfalls might be.
Once you are happy then by all means go ahead and enjoy your new home.