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Paying for home improvements – borrowing on your mortgage or a personal loan?

Home improvements can breathe new life into a property and ultimately add more value, but importantly any improvement to your home will cost money and we look at the two most popular ways of raising the necessary finance.

Taking out a personal loan has traditionally been a way to borrow money in the short term and today rates for taking out a personal loan have fallen to record low levels, with some below 4 per cent. The application for taking out a personal loan is simple and far easier and quicker than the procedure for a mortgage, often this can be done on line or by telephone.

The amounts that you can borrow on a personal loan are anything from £1,000 to £25,000, but remember, the length of the loan will be much shorter than a mortgage and so it has to be paid back quicker. The amount that you will be able to borrow will depend upon your credit rating and this also applies to the interest rate that will be applied. Naturally this means that the monthly payments will be higher than a mortgage, but the interest over the period will be less. To give a simple example; if you borrowed £10,000 over five years on a 4 per cent personal loan it would carry monthly payments of £184 per month and cost you £1,050 in interest, on a mortgage the same amount over a 25 year period would be would mean a repayment of £44 per month but interest over the period would be three times as much at £3,400.

Taking out more on a mortgage to pay for the improvements will depend if you have enough equity in your home. Taking out an extra mortgage will to some degree depend upon how much the home improvements have cost. If you do go down this route, your lender may offer you additional borrowing at one of its main fixed, tracker or variable rates, or it may have special rates for additional borrowing. With mortgage rates at a record low, it is possible to get a fix for five years at below 2.5 per cent, this will be dependent upon how much equity you have in the home, you will need at least 40%, if you have around 10%, then you can still fix but at 4%.

Of course going down the mortgage route will mean that you will have to go through a new application process and ensure you can comply with tougher new affordability rules introduced since April 2014. Although the monthly payments will be cheaper by this method, please consider that the added fees on the best rates and the longer application process may not prove worthwhile. For amounts below £25,000 it may be better to consider the personal loan option.

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