What is a home improvement loan?

What is a home improvement loan?

By Matt Fernell, Editor-in-Chief at Finance.co.uk. Published 28th November 2023.

Matt Fernell

A home improvement loan is a type of loan used for improvements or renovations to your property. Here’s everything you need about how home improvement loans work.

How do home improvement loans work?

Renovation loans work in the same way as other borrowing methods. That means you apply to a lender to borrow a certain amount of money, and if accepted, you’ll receive the money in your bank account. You will then need to repay what you owe over a period of time with interest added.

There are two main types of home improvement loans you can get: secured loans and unsecured personal loans. Here’s how each type of loan works and which might suit your needs.

Secured home improvement loans

With a secured home improvement loan, an asset like your property is used as collateral against what you borrow. That means your home could be repossessed if you can’t keep up with your repayments.

This type of house improvement loan is offered at either a fixed rate, variable rate, or short-term fixed rate, which is a combination of the two. Here are some other key features:

  • You’re only eligible if you own your home with a mortgage 

  • You can borrow over a long term, up to 35 years

  • The equity in your home will impact how much you’re able to borrow

  • You can potentially borrow between £10,000 and £500,000

  • Credit and affordability checks will be carried out before approval

  • You may incur additional fees such as a valuation or broker fee 

  • Your home is at risk if you can’t keep up with repayments

Unsecured home improvement loans

Personal home improvement loans are unsecured and are usually used for smaller amounts than secured loans. 

The interest rate will be fixed, and you’ll repay the loan monthly over a shorter period, typically a few years. Here are some other key features:

  • You can borrow between 1 and 10 years

  • Borrow between £500 and £25,000

  • You’ll need to show evidence of a regular income to repay the loan

  • Credit checks will be carried out before approval

  • You will pay the same interest rate for the whole loan term

Here's everything you need to know about how personal loans work

What can I use a home improvement loan for?

Although the idea behind taking out a home improvement loan is for renovations and DIY, you can use the money for anything you like.

Common reasons people use a home improvement loan include:

  • To fund extensions or loft conversions

  • To carry out major structural repairs

  • Fitting a new bathroom or kitchen

  • Painting and decorating

Depending on the improvements you carry out, a home renovation loan could help you add value to your home. You could even cover the total cost of the borrowing with the increase in value; however, this is not guaranteed.

Can you get a loan with bad credit?

It is possible to get a home improvement loan with bad credit; however, your options might be more limited, and you may have to pay higher interest rates.

A secured home improvement loan could be your best option if you have a poor credit score. Lenders see secured loans as less risky because your home is used as security. That means they could potentially repossess your home to get their money back if you’re unable to make your payments. 

You can get a personal loan if you have bad credit, but it will be harder to find a good deal. Lenders offset the risk by charging higher rates or limiting what you can borrow. Find out more about getting a bad credit loan here.

If you need help managing your debts and improving your credit score, you could get a secured consolidation loan. This combines your debts into one repayment at an affordable rate; however, your property will be at risk if you cannot keep up with repayments.

What do I need to apply for a home improvement loan?

What you’ll need for your home improvement loan application will depend on whether you’re applying for a secured or unsecured loan. 

You often just need to fill in your details for an unsecured loan, and you can get approved instantly. The money can even arrive in your account in a matter of minutes.

However, for a secured loan, you will need to prove your identity and homeownership credentials. You will also need to have an up-to-date valuation carried out on your property, which can come at a cost. Documents you might need to provide include:

  • Mortgage statement

  • Evidence of identity, i.e. passport or driving licence

  • Evidence of income and expenditure

  • Details of any outstanding debts, including credit cards, store cards or other loans

How much do homeowner loans cost?

How much a homeowner loan will cost you overall will depend on a number of factors, including:

  • The amount of money you borrow

  • How long you need to repay the debt

  • The rate of interest you are charged

  • Any loan fees charged

The most crucial factor that will determine the cost of your loan will be the interest rate. Even a small increase in interest rate can add thousands to your loan, especially if you borrow a large amount over a longer period. 

That’s why it’s important to compare rates and get as many quotes as possible to find the best deal.

Most personal loans won’t incur additional fees unless you’re charged late payment penalties. If you choose a secured loan, you may need to pay a few fees, including arrangement and valuation fees.

How can I find a home improvement loan?

Most high street banks and building societies offer loans for home improvement at competitive rates. If you have a good credit history, it’s worth contacting your bank to see what they offer.

Alternatively, get quotes from online lenders or use a broker who will compare loans from a panel of lenders and offer you the cheapest rates. Always shop around to compare interest rates and other features like fees and eligibility criteria.

We can help you find the right home improvement loan with just a few details needed from you. Our brokers can assess your eligibility and get you quotes that meet your requirements. 

Alternatives to a home improvement loan

Before taking out a loan to pay for your home improvements, think about whether you could pay for them with savings. Getting a loan, especially one secured against your property, should only be considered if you can’t afford the cost with money you have saved up.

Other ways to borrow money to pay for home improvements include:

  • Credit card: If you’re carrying out relatively small improvements, a credit card can help you spread the costs. Look for a 0% purchase card, which can let you borrow without paying any interest if you pay back the balance before the end of the introductory period.

  • Overdraft: You could use an arranged overdraft on your current account to cover the cost of any improvements. The interest charged on your overdraft can be higher than a credit card or loan, but you could speak to your bank about accessing a 0% overdraft for a short period.

  • Remortgage: If you need to access a larger amount, you could remortgage with a new lender to borrow more money. This will mean your monthly payments will increase, but the interest rate can be lower than on a personal loan.

  • Further advance: This is a way of borrowing more on your current mortgage. If you have enough equity in your property, your lender may be willing to lend you more on your current terms. However, they may offer a second-charge mortgage at a different rate, which might be more expensive.

The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.