A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. You may have to pay an early repayment charge to your existing lender when you remortgage.
How Can I Release Money From My Property to Fund Home Improvement Projects?
You can raise money to fund home improvements, using the equity available in your property in a number of ways, such as: a further advance with your existing mortgage lender; a remortgage with a new lender; or a second charge loan. We explain these options in more detail below.
What home improvement projects can I fund with a mortgage?
You can pretty much fund any types of home improvements, such as a house extension, loft extension, a new kitchen or bathroom, new flooring, solar panels, garden works, new flooring, and so on. These projects will be classed as “improvements”. Note that home improvement is not a full structural development of a house, so if you plan to knock down and entire building and re-build it, this will require more specialist property development finance, which we are not covering in this article.
Releasing Equity available in your Home
The equity in your home is the difference between the value of the property and the outstanding mortgage balance. If you have enough equity, you may be able to release some of it, by remortgaging to a new lender and raising funds, or by borrowing more money from your existing mortgage lender via a further advance, or by getting a second charge loan.
For instance, if your home’s current value is £500k, and you owe £350k on your mortgage you have £150k available in home equity and you may be able to release some of it to fund your home improvement. In this scenario, your current loan-to-value (LTV) is 70% ( = £350k/£500k), and you have 30% of available home equity.
Let’s say that you need to release £50k to fund your home improvement projects; your new combined loan will be £400k (£350k current mortgage + £50k new funds), and so your new LTV will increase to 80%, and the remaining available home equity will decrease to £100k (20%).
Mortgage lenders have different criteria (i.e. rules) around the maximum LTV that they will allow after releasing equity. As a general rule, the majority of lenders can go up to 85%-90% LTV. However, some lenders can go up to 95% depending on the size of the loan, the type of property, as well as your credit score and ability to afford the new larger loan.
Let’s look at these options in more detail below.
1. Further Advance with your existing mortgage lender
A further advance is also called a “top up loan” from your current mortgage lender, to let you fund your home improvement. For instance, let’s say that you need £50k to extend the loft, so you would apply for a further advance of £50k with your current mortgage lender.
The new combined loan, made of your current mortgage and the further advance, will need to be affordable; so your existing mortgage lender will assess your affordability in order to confirm how much you can borrow with the further advance.
What are the advantages of a further advance?
If you are currently locked in a deal with your existing mortgage, you may not be able to remortgage to a new lender unless you are prepared to pay potentially expensive early redemption charges (ERC); thus a further advance will let you keep your current mortgage deal and avoid those potential ERC, whilst you may still borrow the money that you need for your project.
When does a further advance may not be the best option for you?
Your current mortgage lender may not have the most favourable rates, or they may limit the LTV so that you may not be able to borrow what you need.
Also with a further advance, you may end up with two loans that have different end dates, and this can make it a little harder to plan for a future remortgage. For example, you may have a current mortgage of £350k with a fixed rate expiring next year; and a £50k further advance with a rate fixed for two years; this means that when your current £350k fixed rate will expire next year, you will still be locked in the rate of the £50k of your further advance.
Alternative options to a further advance are remortaging or a second charge loan.
2. Raise money with a Remortgage to a New Lender
Remortgaging to release equity can be a great way to get the funds to pay for your renovations. As you remortgage to a new lender you will borrow additional money, on top of your current mortgage, that you can use to pay for your home improvement project.
For example, if you have £350k outstanding on your current mortgage and need £50k for home improvement, you can remortgage to a new lender with a new mortgage of £400k. This way, you can use £350k to pay off your existing mortgage lender, and raise the £50k for the home renovations. The new larger mortgage of £400k will have a bigger monthly payment, and you will want to ensure that this is still within your budget; the new mortgage lender will assess your income and expenditures to make sure that you will continue to afford the new mortgage payments.
A remortgage to a new lender may be considered as an alternative to a further advance with your existing lender in cases where the new lender can lend you more money than your existing lender, as they may have more generous affordability calculation; or if they can offer you better rates or better terms, such as a longer mortgage term, to help reduce your overall monthly payments. The new mortgage lender may also let you borrow up to a higher LTV.
The above are some of the reasons why a remortgage may be a better option than a further advance. However, your scenario will be unique and you will want to talk to your broker to understand was is more suitable to you.
3. Second charge loan
A second charge loan lets you tap into your home equity, to borrow money on your property. A second charge loan is like having a second mortgage on your home from a different lender. You may consider a second charge lender, if your current mortgage provider does not let you borrow the money that you need via a further advance or if you do not want to remortgage to a new lender, as you may still be locked in a good deal with your current mortgage.
The amount that you can borrow on a second charge loan will still be based on affordability, and subject to a maximum LTV. Interest rates on second charge loans tend to be higher than mortgage rates, but they are typically lower than rates on unsecured loans or some credit cards.
Furthermore, a second charge loan can typically be done for a longer term than a personal loan, meaning that the repayments can be spread over a longer period of time, and thus be typically lower.
With a second charge you may end up with two loans that have different end dates for the product rates, and this can make it a little harder to plan for a future remortgage, in a similar way as we described for a further advance.
Remember that all lending secured on your property, can put your property at risk of repossession if you do not keep up with repayments. A further advance, a remortgage, or a second charge loan are all forms of secured lending. Personal loans or credit cards, on the other hand, are “unsecured” lending.
What Factors Should I Consider When Remortgaging for Home Improvements?
Cost of home improvements, financial situation, age and possible available alternatives are factors that impact the remortgage for home renovation process. Let’s dig into these further:
- Cost of home improvement: Your lender needs to know what you intend to use the money you borrow for and the precise costs. So, it’s best to estimate renovation costs to answer your lender’s questions; you may also want to back up those estimates with a couple of quotes from builders so that you know you are budgeting for your project correctly.
- Financial situation: Borrowing more on your mortgage often attracts larger monthly repayments. So, determine how much you can conveniently pay while factoring in your regular living expenses. Affordability is ultimately a key important consideration.
- Age: Your lender will consider your age and your intended retirement age, to determine if you can make repayments during your lifetime, influencing how much you can borrow.
- Possible alternative: before you borrow money on your home, you may also want to consider unsecured lending, such as a personal loan instead. A personal loan is typically for a term between 2-7 years. A mortgage and a further advance would normally have a longer term, which may have the benefit of lower monthly repayments, but may also mean that you can end up paying more interests over the longer term.
Considering these factors ultimately influences your remortgage. So, it’s best to prioritise them to get the best deal. This is where you would want to get the help of a professional to help you crunch and compare the numbers and the options.
Is Remortgaging for Home Improvements a Good Idea?
Remortgaging can be an excellent idea to fund your home renovation. It can be an “easier” option on your pocket, as with a mortgage the monthly payments can generally be spread over a long period. Remember though that adding debt on your home also means that the mortgage lender may repossess your own home if you do not keep up with repayments. Remortgaging for home improvement can ultimately provide access to capital that may otherwise not be available, and that you can use to transform your own home to both improve the quality of your life and increase the value of your property.
How Do I Release Equity from My Home for Home Improvements?
You can consider how much you want to release when you know the amount of equity you have in your home. However, it is noteworthy that many lenders don’t lend more than 95% of the property’s value. Lending up to 95% may also put you at risk of negative equity if the price of the home falls more than 5%. You should also talk to your broker to understand what may be the best options available to you, as a broker has access to a large number of mortgage lenders and can more easily assess affordability, and compare rates and terms across the market offering.
How Long Does It Take to Remortgage?
Remortgaging your home typically requires 4 to 8 weeks after application. However, the duration varies based on your unique situation. Ensure to provide relevant and accurate documentation when necessary to avoid delay. It’s also best to consult a mortgage adviser to facilitate the process through proper guidance. You can learn more about choosing a reliable mortgage adviser in this excellent resource.
Remortgage for Your Home Renovation Successfully With Your Mortgage Experts
Remortgage for home renovation can be a life changing and profitable decision, but it requires proper consideration and planning. Having the right mortgage adviser by your side allows you to navigate the process effectively.
At Your Mortgage Experts, we are a team of knowledgeable mortgage advisers with over 20 years of experience. We help homebuyers and homeowners seamlessly navigate the intricacies of their mortgage and remortgage processes through expert guidance. So, we’ve got you covered if you want in-depth clarification, advice, and tips on how to remortgage for home renovation. Contact us now for a personalised consultation.
Luca BertolinoMortgage Expert
Your Mortgage Experts is led by Luca Bertolino with 20 years experience in financial services and in the property market. Through Luca’s wealth of knowledge and expertise, Your Mortgage Experts have become a trusted adviser that clients have come to rely upon for all their mortgage and protection needs.