Home need a revamp? We explain how to fund it with a remortgage

Home improvements are high on the agenda for UK property owners this year – which makes sense since we have been spending so much time around the house. 

According to a UK study commissioned by online mortgage broker Habito, 62 per cent of homeowners want to carry out renovations this year.

Of these, 37 per cent plan to fund their project by remortgaging. 

On the other end of the scale, the survey also found that one in ten homeowners did not know that remortgaging could be used to help fund home improvements.

Of those looking to renovate, roughly one in five are planning to remodel their gardens, with a similar number intending to refurbish their kitchens.

Bathroom renovations are being planned by 16 per cent, whilst 8 per cent are considering an extension or side-return.

‘It’s no surprise that a lot of homeowners are looking at their homes, imagining more months locked-down in them, and thinking about how they’d like to improve their living spaces,’ says Will Rhind, mortgage expert at Habito.

‘While general painting and decorating can often be paid for out of savings or a small personal loan, bigger projects – like extensions, attic conversions, or a brand-new kitchen – can cost tens of thousands of pounds.

‘So it’s important that homeowners know that the option to remortgage for home improvements exists, and think about the best way for them to finance their dreams in ways which don’t leave them paying over the odds.’

How does remortgaging for home improvements work? 

If the value of your home rises with time, it also means your equity share in the property increases.

For example, if you purchased a property worth £200,000 with a mortgage of £160,000, and five years later, your property is worth £250,000, the value gain is all yours, and not the lender’s.

Green fingers: One in five UK homeowners is looking to remodel their garden this year

If your original mortgage agreement had been to pay off £160,000 over a 25-year period, you would have also reduced the mortgage amount down to about £134,000 after five years.

Taken together, this means that in the space of five years, your ownership stake in the property would have increased from just 20 per cent (£40,000) to 46.40 per cent (£116,000).

Remortgaging allows you to take advantage of this gain, enabling you to release some of your equity towards home improvements if you can afford to do so.

‘For many, raising additional funds via a remortgage in order finally to upgrade a kitchen or bathroom that has been planned since moving in can make sense,’ says Andrew Montlake, managing director at Coreco mortgage brokers.

‘A remortgage works like any other mortgage application, and a good broker will work out how much additional money you can borrow on top of your existing mortgage to pay for the works you need doing.

‘Affordability is calculated as usual, with the lender assessing your maximum borrowing to include the existing mortgage and the amount you want to top up.’

When should I remortgage for renovations?

Remortgaging to a cheaper deal is always sensible, but it might make particular sense if you need to fund some major renovation works. 

‘If you’re considering carrying out larger works – potentially costing tens of thousands of pounds – you can usually be approved for more borrowing from your mortgage lender, compared to a personal loans company which often caps borrowing at lower amounts,’ says Rhind. 

With a remortgage being secured against your home, the interest rates are also typically lower than with an unsecured personal loan, for example.

For the average person using an unsecured loan to borrow £25,000, the current representative APR is 4.9 per cent according to the most recent Moneyfacts data.

In contrast, the average two-year fixed rate mortgage deal is just 2.55 per cent.   

Looking at the best available rates, the picture does not change much either. 

The cheapest five-year fixed rate deal available for remortgaging is 1.19 per cent, according to Moneyfacts. 

In comparison, the cheapest offer available for a £25,000 personal loan over a minimum five year term is 2.90 per cent offered by Tesco Bank, according to Loans Warehouse. 

Money maker: If the value of your home goes up, your equity share goes up too

A remortgage also typically gives you a longer timeframe in which to repay the loan, meaning it is likely to cost you less each month.

But this can also mean you are spreading out the repayment over a much longer time period, so you may end up paying more interest overall.

One downside to remortgaging is that you cannot do so until your introductory rate of interest finishes – typically a two or five year period – without facing extra fees. 

Remortgaging prior to your initial rate ending will usually result in you being hit with early repayment charges, which often range between one to five per cent of the outstanding mortgage amount. 

This might mean you will have to wait for your initial deal to end before you can start your renovation project.

Another, albeit riskier, option would be to obtain a further advance or a second charge mortgage on your home, essentially meaning you will have then have two loans secured against your property.

This can complicate matters, as you will then have a different product, with a different end-date, at a different rate on top of your primary mortgage deal.

‘We often see clients who have part of their mortgage rate expiring a year before the other, which usually causes issues and can lead to the borrower having to pay out unnecessary early repayment charges,’ warns Montlake.

I want to remortgage. Where do I start?

First, you need to be clear in your mind about how much your home improvements are going to cost.

‘Get professional estimates for how much the renovations will cost, including any architects’ plans, planning permission and building regulation inspections,’ says Rosie Fish, mortgage expert at Habito.

‘Don’t forget to include VAT and a budget for possible extra expenses in case the work falls behind schedule.’

Then, you need to be prepared to present this information to the lender.

‘Lenders will often want you to provide evidence of the cost of the works planned,’ says Jonathan Harris, managing director of Forensic Property Finance. 

‘Be prepared well in advance with quotes and costs.’

Your next move should be to speak to a professional mortgage broker to check that you will be able successfully to remortgage at the required amount.

‘A mortgage broker will also look at whether or not it is better for you to wait until your existing mortgage deal finishes or whether it is worthwhile, for example, taking out a second charge loan instead,’ says Montlake.

In terms of timing, it might be wise to wait until your introductory period comes to an end to avoid any early release penalties on your mortgage.

‘Check if you are on a two, three, or five year deal, as these are the most common lengths of the initial deal period, and know when you are coming to the end of that period,’ says Fish.

‘When you are six months away, start looking into the available options as arranging this type of remortgage can take a little time.’