There are a zillion articles online about finance options for home renovations and extensions, but most of them are written (or sponsored) by finance providers. This is one is not and is intended as a broad overview of the options available to you.
The content in this article is for informational purposes only, you should not construe any such information or other material as financial advice. Please seek advice based on your particular circumstances from a financial or mortgage adviser.
1. Personal loan
This option can be simpler and faster to arrange than a secured loan (e.g. mortgage, second charge).
An unsecured personal loan (‘unsecured’ meaning that it’s not set against your property/assets) can be up to ten years for up to £50,000. However, two to five years is much more typical, and the rate and overall cost will be much lower, the shorter the term. Personal loans of more than £25,000 are usually, therefore, unaffordable as the repayment amounts would be very high.
For amounts of more than £25,000, this is usually the most financially attractive route in terms of repayment terms and interest rates, particularly if you have a good amount of equity in your property. However, if you are locked into a term and would need to pay early repayment charges, it may be untenable.
3. Mortgage further advance
If you are halfway through a fixed term, and want to avoid early repayment charges, ask your lender if they have a further advance option. This should be cheaper than a second charge loan with a different lender.
4. Second charge loan
A second charge loan is secured against your property and is taken out in addition to your mortgage from a different lender. These loans are similar to a regular mortgage in that they are often taken out over a long period of time, and the rate of interest should be much less than a personal unsecured loan.
The amount you can borrow will be based on your home’s loan to value ratio. For this calculation, the loan terms will take into account your original mortgage + the new second charge loan. This will be calculated as a percentage of the current market value of your home (not what you paid for it).
The interest rate of a second charge loan is usually higher than your original mortgage as the lender is taking a greater risk (being second in line if you fail to make payments and the property is re-possessed).
Why would you choose a second charge loan instead of a re-mortgage or further advance?
In short, you probably wouldn’t, if re-mortgaging or further advance from your mortgage lender was an option.
A second charge mortgage might be suitable if:
- you are tied into a mortgage deal and would be stung by early repayment charges.
- have credit issues. Second charge lenders can be a little more lenient as the loan amount is lower.
- your personal circumstances have changed since you arranged your original mortgage, and you may not be eligible to borrow a higher amount, based on your earnings, debts and outgoings.
5. Credit card
This option is unlikely to be suitable for a whole project as most credit card limits wouldn’t cover the whole project costs. However, it could be utilised for certain items if the balance can be repaid quickly to avoid fees. Alternatively, you could arrange a 0% interest deal and make sure you pay the balance within the 0% interest free term.
6. Friends and family
This can be the simplest and cheapest way of borrowing money and may be the only option if you don’t have a good credit score. There are now apps that make friend and family lending more structured, setting out payment terms and giving peace of mind for you both.
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