As house prices soar and the cost of living rises, many homeowners are choosing to renovate their property rather than move. Whether you’re tired of your kitchen or need to turn your double bedroom into two singles, upgrading your home to suit your needs can be a lot cheaper than finding a whole new house! That being said, renovations still come at a cost.
If you’re struggling to fund yours, we’ve put together some tips to help you get the money you need for your dream home.
1. Apply For a Home Equity Loan
A home equity loan is essentially a second mortgage – that is, a mortgage on top of your existing mortgage. This system allows you to borrow money using the equity of your property as collateral and is one of the most popular ways of funding renovations. If you own your home outright, you can often borrow up to as much as 80% of its current value, which should make budgeting for home improvements a breeze! Be aware, though, that you’ll have to meet strict requirements to qualify for a home equity loan. These usually include:
Equity is simply the difference between the value of your property and how much you still owe on your mortgage. This plays a large part in how much you can borrow and allows your lender to determine the loan-to-value ratio (LTV). To increase your equity, try to pay off more of your mortgage bill or carry out home improvements.
It’s common for lenders to check your income before giving you a home equity loan. This is done to determine whether or not you have enough to pay back your loan according to their repayment plan and help them gauge how much they can safely give you.
A Good Credit Score
Ideally, your credit score should be in the high 600s for you to qualify for a mortgage. Anything over 680 is favourable, though a score of over 700 is often preferred. If you do have a lower credit score, you can find lenders who will still be willing to lend but will give you a higher interest rate.
A Good Debt-to-Income Ratio
Your debt-to-income ratio is the comparison between the debts you owe and your monthly income. The percentage is calculated by dividing your debt by your income, and the lower your score, the better. Ideally, your debts should take up no more than 40% of your monthly pay cheque, though some lenders will be happy with 50%.
2. Construction Loan
A construction loan follows the same principle as a home equity loan. However, the lender will consider the value of your home after renovations are done, not only the current value. It’s a staggered loan, too, meaning that you’ll receive it in regular payments rather than one lump sum.
3. Equity Release Mortgage
Speaking to an equity release mortgage broker about equity release is an option for homeowners over 55 and paid off or are currently paying off a mortgage. Like a home equity loan, you’re borrowing against the current value of your property. However, there are no regular repayments with an equity release mortgage, making it a far easier debt to manage.
Instead, the loan will be repaid when your property is sold, taking the money from the final figure you receive. If home renovations are set to increase your property value, this loan could end up paying for itself.
4. Personal Loan
For minor renovations, you may be able to fund them with a simple personal loan. Some lenders will offer up to around £50,000 if you have a good credit score and a suitable income, and the process of receiving your money can be easier than taking out an equity loan. However, interest rates are often high, so be sure you have the funds to pay back your loan and are prepared for a few years of debt.
5. Ask Family and Friends
Many people shy away from asking family members or friends for a loan but it’s the safest option for raising renovation funds. There are no late payment fees, no hefty interest charges, and a missed payment won’t affect your credit score.
Before speaking to your family or friends, be sure to get your finances and renovation plans in order. Detail how much you’ll need and create a repayment plan that you can stick to, sharing all financial information they wish to know. You can even offer a small amount of interest on the loan to help win them over. This will still be less than a bank will charge but makes it a win-win for both parties.
Renovating your home is a great way to create a space you love without having to move. Hopefully, these tips for raising the funds you need will bring your dream home that much closer! Just remember to work on your credit score and pay off as much debt as you can before you start applying for loans.