Financing Home Renovations: A Comprehensive Guide

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How to Finance Your Home Renovations

Dreaming of a home makeover but worried about the costs? Discover how you can transform your space without draining your savings.

Do you like your home but wish it had a newer or bigger kitchen? Or do you love your area but can’t find a new property in the same location that offers a little more within your budget? Moving house can be expensive, and sometimes, it’s just not the right option.

But what if you could renovate your current home? Could you transform it into something you can stay in long-term or increase its value so that you can sell it later?

Of course, renovation isn’t free, and using savings isn’t always an option (or desirable). Below, we cover all the details you need to get started and how we can help you get the finance you need.

In this article, we will cover:

What is a home improvement loan?
First and second charge loans
What home improvements can I get a loan for?
How much can I borrow for home improvements?
The mortgage costs when financing home improvements
Benefits and considerations of home improvement loans
The application process for further advances and second charges

What is a home improvement loan?

Several options exist for funding home improvements, including secured and unsecured debt facilities. In this blog, we’ll discuss the secured loan options that MFB can help you with.

These secured loans have many different names but essentially do the same thing. These names include:

Home improvement loan
Home equity loan
Further advance
Second charge mortgage

All of these facilities use the available equity in your property to give you cash to complete your home improvements.

You can also access these loans if you’ve already paid for the improvements with an unsecured personal loan or credit card and want to consolidate the debt so it’s all secured against the value of your home.

Please note that further advance and second charge mortgages differ from Equity Release mortgages.

First and Second Charge Loans

Before we go any further, it’s essential to understand the difference between 1^st and 2^nd charge lending, so here’s a quick overview:

First-charge: Typically, your mortgage is a type of first-charge lending. If you fail to keep up with mortgage repayments and face repossession, your mortgage lender is first in line to recoup the money you owe them by selling your property before any other outstanding debts.

Further advances can only be issued by your existing 1^st charge lender. Keep in mind that not all lenders offer further advances.

Second-charge: Second-charge lending means that a separate lender issues you a loan based on the available equity in your property. Should your property be repossessed, this lender is 2^nd in line (behind your primary 1^st charge mortgage lender) to recoup their loan.

Before considering applying for a 2^nd charge loan, you must check whether your primary mortgage lender allows it. Not all mortgage lenders allow you to have a 2^nd charge against your property. Our friendly broker team at MFB can help you find this information.

What home improvements can I get a loan for?

Lenders accept a wide variety of home improvement plans as long as you have enough available equity in your property. These include (but are not limited to):

Renovations: new kitchens and bathrooms, replacing flooring and general painting and decorating.
Structural changes: extensions, garage conversions and loft conversions. Your lender may want a schedule of works for bigger structural projects, and you must check whether you need planning permission for any structural changes to your home.
Energy efficiency improvements: wall, roof and floor insulation, replacing windows and doors, installing solar panels, and replacing or upgrading heating systems.

How much can I borrow for home improvements?

How much you can borrow with a further advance or second charge depends on 3 main things:

The value of your home
The available equity
Your affordability

Suppose your home is worth £300,000 and your outstanding mortgage balance is £200,000. This means you have £100,000 in equity. Assuming your lender allows a 90% loan to value (LTV), you could potentially borrow up to £90,000 (90% of £100,000) for home renovations.

However, remember that your credit score, income, and outgoings impact this calculation. Lenders use affordability calculations to ensure you can afford your borrowing. Typically, lenders will only lend you between 4-5x your income. This means your lender might decide you can’t afford to borrow up to 90%.

The best way to find out how much you could borrow for home renovation is to speak to our friendly, expert team, who can do all the calculations for you.

The mortgage costs when financing home improvements

Rates for this type of short-term finance will be more expensive than your home mortgage product, and the extent of the improvements will impact the rate you can access. The best way to find out what rates you can access is by speaking with us.

There are some additional fees you’ll need to factor in, such as:

Arrangement fees—These can be added to the loan and are typically between 1% and 2%, but they will depend on your lender.
Product fees – The lender may charge an upfront cost for the product you choose
Valuation fees - Your lender may need to complete a valuation of your property before underwriting the loan, which can incur a fee. If you’re making an extension or any other structural changes, your lender may need to re-value the property once the works are complete to check the new value.
Legal fees - In addition to the legal costs associated with the loan, you’ll need to factor in the lender’s legal fees.
Broker fees – We work hard and use years of expertise to research and secure the best mortgage loan for you, saving you lots of time and, often, money. For this service, we do charge a fee.

Benefits and considerations of home improvement loans

As mentioned, you can use unsecured loans (e.g. personal loans and credit cards) to complete your home renovations. However, there are several benefits to using secured mortgage loans:

Lower interest rates – Further advances usually have the same interest rates as standard mortgages, which are typically cheaper than the interest rates for unsecured loans. However, second-charge mortgages are generally more expensive.
Longer repayment terms – Because further advances and second charges are mortgages, you can spread the cost over more extended periods, e.g. 25-30 years if necessary. This helps keep monthly repayments down, making accommodating the costs into your monthly budget easier. Personal loans usually require you to repay them within 5 years.

However, if you don’t have enough available equity in your property, unsecured personal loans might be your only option.

Whatever option you choose, it’s essential to seriously consider:

How the repayments will impact your monthly outgoings and budgeting
How long do you plan to stay in the property; is this your forever home, or do you intend to sell and move in the future? In which case, when is that likely to happen?

What is the application process like?

The application process involves several steps for your lender to ensure that it’s the right option for you.

A full affordability assessment will be carried out. Your lender needs to see that there’s enough available equity in the property to cover the costs or that the uplift in value after renovation will be enough to repay the loan. This part will be almost identical to a normal mortgage application.

Depending on the loan amount and planned improvements, lenders may want to see a full schedule of works and evidence that planning permission (if required) has been granted.

Generally, applications for a further advance or second charge take 2-5 days to process. However, this depends on the complexity of your project and the application.