Have you ever thought about renovating your home to get that dream kitchen and luxury en-suite, but don’t have a spare few thousand just sat in the bank? Heres a few options you can use to potentially fund your home improvements.
The average 3-bed house costs £76,900 – £138,800 to renovate according to Checkatrade, so although theres clear benefits to improving your home and potentially adding value to the property, it can be daunting to know how to raise the capital required. Heres a few options you may not have realised are available to you.
Equity release for home improvements
A popular way to borrow money for a home improvement is to release equity from your property, where you could potentially release up to 90% of the value of your home including what you have already borrowed to buy the house.
The amount you can borrow depends on your personal circumstances and lenders various policies, but this is often the most affordable option, as you’re borrowing a large sum of money but over a longer term.
Trowbridge Broker Gem Mortgages has advised us on some of the key information about releasing funds through your property, to help you decide which option might work best for you.
Additional load on existing mortgage
If you have a fixed rate mortgage (often for 2 or 5 years), then there is normally an early repayment charge to discourage you from leaving the deal early, so if you are mid-way through your mortgage deal and want to avoid the charge, then your best bet might be to get an additional loan that sits alongside your existing mortgage from your existing mortgage lender.
Re-mortgaging to release funds
If you are not tied into a deal and don’t have any early repayment charges, then it makes sense to look for a new mortgage which includes the extra money you want for your home improvements, this is called a re-mortgage.
How much money can I release from my house
This depends on lots of factors, like your income and any existing credit commitments, how much your house is worth, and how much you already have on your mortgage. For example, if you have a relatively small mortgage against your property but it’s worth quite a lot, then it’s likely that you have a small Loan to value, so that means there should be a decent amount of equity that can be released.
How is loan-to-value calculated?
The below illustration explains how loan-to-value is calculated, which is essentially the amount you currently have on your mortgage, divided by the property value, multiplied by 100 to get the percentage.
How to estimate how much equity you can release?
You may want to reverse-engineer the loan-to-value calculation to get a rough estimate of how much equity you can potentially release from your home. All you have to do is multiply your property value by the loan-to-value (LTV) percentage that mortgage lenders say they will lend on, minus the value you already have on your current mortgage. For example, if you think your house is worth £120k currently, and your mortgage provider has said they will lend up to 90% VLT, then your total potential borrowing would be £108k, and if you only have £50k on your mortgage then you may be able to have the remaining £58k for home improvements.
What should I do if I want to release funds through my mortgage?
First of all, check your current mortgage offer and see what your current terms are; do you have an early repayment charge and if so, how much is it. Then have a look around at what mortgage providers are offering, alternatively speak to a mortgage broker who will check against multiple mortgage lenders. Compare the overall costs including penalties, fees, and interest rates, to see which option is best for you.
Secured loans or second charge loans are separate from your existing mortgage. With this type of loan, you’re in effect taking out a new and separate mortgage in addition to your existing one, using your property as security for the repayment of the loan, which is generally at a higher interest rate.
Risks of borrowing against your home
The above advise is for information purposes only, and homeowners should think carefully when committing to any borrowing especially against their home. If you do not keep up with repayments then your home will be at risk of repossession, so an expert can help advise on affordability.