Using your mortgage to cover home improvement costs
Mortgages aren’t always about moving. Sometimes, you want a new deal to help you improve the home you’re in.
Whether you’re looking to build an extension or renovate existing rooms, home improvement projects can be costly. Remortgaging is one way to pay for them.
Remortgaging for refurbishment means increasing your mortgage to cover the cost of the work. In other words, if you owe £200,000 on your mortgage but you’re looking at £30,000 of improvement work, you get a new mortgage for £230,000.
Of course, this means your repayments will go up. It also means you’ll pay more than £30,000 for your home improvements in the long term. But it allows you to pay off your projects over a number of years, making it much more manageable.
If you’re thinking of remortgaging for home improvements, here are some things to consider:
Will the work add value to your home?
Remortgaging to pay for a new kitchen or conservatory is easy to justify if it’s going to add value to your home. If the £30,000 you spend puts similar value onto the house, then in a sense, the project is paying for itself.
It’s not always the case though. Sometimes, what you consider to be home ‘improvements’ may make the property less desirable to future buyers.
Every area has its ‘ceiling price’ too. By ceiling price, we mean the maximum price buyers are likely to pay for a house in any given location, regardless of how much work has been done to it.
If your property is already close to that ceiling before you start the work, you may find it doesn’t gain as much value as you think. Speak to a local estate agent and get their view before pressing ‘go’ on your project.
Remortgaging v personal loan
Remortgaging isn’t the only way to pay for refurbishment or extension projects. Assuming you don’t have the cash lying around, you could take out a personal loan instead.
You might be eligible for a ‘further advance’ too. That’s when you take on more borrowing from your lender, but at a different rate to your main mortgage. You’ll need to do some maths here to see what’s the most sensible route for you.
Look at your LTV ratio
If you’re planning on increasing your mortgage, make sure you know what the additional amount would mean for your loan-to-value (LTV) ratio.
LTV is the ratio between the value of your property and your mortgage. It’s expressed in percentage terms. Mortgage lenders have different prices for loan-to-value brackets at 60%, 70%, 75%, 80%, 85%, 90% and 95%. The higher the percentage, the more interest you’ll usually pay.
As an example, if you take out a £230,000 mortgage on a £300,000 house, the loan covers 76.7% of the value. That puts it in the 80% bracket. You’ll pay a higher rate of interest in this bracket than you would on your original £200,000 mortgage, which would be in the 70% bracket.
Once you know what the interest rate is for your new LTV bracket, you can compare it to the interest you might pay on a personal loan.
Loans will often have a higher interest rate (and monthly repayments) but might be paid back over a shorter timeframe. That could mean you’ll actually pay less back on a personal loan overall.
Remortgaging after a home improvement project
If you’re able to cover the costs of your home improvements with cash, you might be in a great position to remortgage after the work’s been done.
Assuming the changes have increased the value of your property, you’ll be able to remortgage to deal with a better LTV ratio. That’s because the amount of equity you have in your property has gone up along with its market value.
The money you save on your monthly mortgage payments helps to pay yourself back for the project costs.
Factoring in redemption fees
Whether you decide to remortgage before or after your renovation, bear in mind you may need to pay redemption charges unless your current mortgage is already at an end.
A redemption fee is sometimes called an exit fee. It’s a charge you’ll usually need to pay if you choose to move your mortgage to another provider.
These fees vary but can be significant, so should be factored into the overall cost. Check your current mortgage deal to see what you might need to pay.
Ultimately, whether remortgaging for renovation is the right decision for you will depend not just on your current deal, but your wider financial circumstances. If you’re in any doubt, it’s always best to seek financial advice.
Your mortgage is secured on your home. Your home may be repossessed if you do not keep up repayments.