Should you remortgage to finance home improvements?

More than 1 / 2 of homeowners are looking to renovate in 2021, but is it smart to refinance your mortgage to fund home improvements?

The Covid-19 pandemic makes us re-evaluate what we want from your homes, resulting in a surge of buyers battling for bigger properties with increased outdoor space.

But with house prices rising in the wake from the stamp duty holiday, many householders are instead focusing on taking advantage of their existing properties rather than upping sticks.

When it comes to major small remodels, one of the most common questions is around the best way to invest in them – be it by using savings, getting an unsecured loan or charge card, or by remortgaging.

Here, Which? explores whether low mortgage rates mean refinancing your home loan could be a viable method of funding renovations in 2021.

Homeowners look to renovate in 2021

New research through the online large financial company Habito discovered that 62% of house owners are intending small remodels in 2021.

33% of these seeking to renovate say their improvements could be restricted to painting and decorating, while 20% intend to remodel their gardens.

A further 18% of homeowners said they would enhance their kitchen, while 16% will renovate their bathroom and 8% will consider building extra time.

Remortgaging to pay for home improvements

Major home improvements for example building extensions and remodeling kitchens cost a lot of money, so you might need to access some type of credit to fund them.

Habito says a third of homeowners plan to remortgage to finance renovations, but 10% of respondents weren’t conscious that it was possible to raise the money this way.

How does remortgaging to borrow more work?

If you've got a fixed-rate mortgage, you’ll result in the same repayment every month for a few months – usually two or five years. At the end of this era, you’ll need to remortgage.

When switching deals, it’s easy to apply for an additional sum, for instance to fund home improvements.

There are three important aspects that govern whether you’ll be able to borrow extra cash when remortgaging.

The first is the quantity of equity you own in your house. For example, if you originally got a 80% mortgage but have since made two or 5 years of repayments, you’ll now own a lot more than your original 20% chunk, which could make it simple to borrow more.

The second factor is when much your home has grown in value because you got it. For instance, when the worth of your property is continuing to grow by lb20,000 within the 5 years you’ve owned it, you’ll have extra borrowing power when you come to remortgage.

Finally, lenders will take your present financial circumstances into account, just like your earnings, job stability and then any other debts.

Is it cheaper to remortgage?

Adding the cost of small remodels to your mortgage could be less expensive than other kinds of finance for example getting an unsecured loan or utilizing a credit card.

The best rates on personal loans are generally around 3% to 4%, but remortgaging rates could be considerably lower. You’ll also be able to repay the total amount borrowed over the term of your mortgage, as opposed to the three or five-year terms common on personal loans.

The rate you’ll get when remortgaging depends upon the loan-to-value level you’ll be borrowing at. The best rates now available on two-year fixes are listed below:

When is remortgaging to renovate a bad idea?

If the need for your house has increased and you’ve developed enough equity, remortgaging to finance small remodels can be a savvy move.

There are a few instances, however, where it might be better financing your renovations a different way.

You’re locked into a long-term fix

The end of your fixed term is the greatest time for you to remortgage, as switching deals mid-term can be very expensive.

For example, for those who have a five-year fix, you will probably find that it comes with high early repayment charges.

These charges reduce the longer you will find the deal, but could be around 5% from the mortgage balance in the first year.

If you’re mid-deal and want to explore your choices, it’s worth contacting your lender to ask whether it can offer an additional sum.

In this instance, there’s no be certain that any extra borrowing is going to be in the same rate as the rest of your mortgage, so make sure you weigh up alternatives before proceeding.

You’ll be stretching your finances

If you've got a high loan-to-value mortgage (for instance 90% or 95%), a couple of years price of repayments won’t have made a substantial dent into the balance or provided of sufficient length to build up much equity.

If this is actually the case, you may struggle to borrow more when remortgaging, or else you may find it pushes you on to a more expensive rate.

In these circumstances, it may be best to carry off for some time or find an alternative route of funding your renovations.

You’re renovating to enhance value within the short term

There are lots of reasons to renovate your home, but when you’re going to spend a lot of money on improvements, it’s vital that you ensure doing this will prove to add towards the worth of your home.

If you’re improving with the intention of selling your house within a few years, consider whether renovating the home really makes financial sense.

Spending a sizable sum (and taking on more debt) so that they can increase a property’s value in front of sales is a gamble – and won’t necessarily provide the uplift you hope for in the short term.

Better deals for green home improvements

If you’re seeking to make energy efficient improvements to your house, it’s worth investigating whether you may get a cheaper mortgage rate.

Earlier now, Nationwide announced it would cut its rate on ‘Green Additional Borrowing’, allowing customers to borrow one more lb5,000 to lb25,000 for energy-efficient improvements for a price of as little as 0.75%.

Nationwide isn’t the only real lender to offer green mortgage deals, with Barclays and Natwest also offering cheaper rates for people with energy-efficient homes.

Advice on home improvements

If you’re thinking about enhancing your home this year, we’re here to assist.

For example, our kitchen ideas guide is the first the avenue for call for design inspiration, while our help guide to kitchen costs will help you make sure the numbers accumulate.

You can also take a glance at our step-by-step guide to loft conversions or our advice on how to buy the best garden room if you want to add extra room to your home.

Finally, why not check out Which? Trusted Traders to locate a reliable trader to bring your house improvement project alive.