Remortgage for Home Improvements

How Does Remortgaging for Home Improvements Work?

When you remortgage for home improvements, you are essentially replacing your current mortgage with a new, larger one. The difference between your existing mortgage balance and the new mortgage amount is released to you as cash, which you can then use to fund your renovation projects.

For example, if your property is worth 300,000 pounds and your outstanding mortgage is 150,000 pounds, you have 150,000 pounds of equity. A lender might allow you to borrow up to 80% or even 90% of your property value, meaning you could potentially release a substantial sum for improvements.

The process works as follows:

• Assess your equity - Work out how much equity you have in your property by subtracting your remaining mortgage from its current market value.
• Decide how much you need - Get quotes for the improvement work and decide how much additional borrowing you require.
• Apply to remortgage - Either approach your existing lender for a further advance or apply to a new lender for a complete remortgage with additional borrowing.
• Valuation and approval - The lender will value your property and assess your affordability before approving the additional funds.
• Completion - Once approved, the new mortgage replaces your old one and the extra funds are released to you.

Most lenders are happy to lend additional funds for home improvements, as the work typically adds value to the property, which strengthens their security. You will usually need to tell the lender what the funds are for, and home improvements are generally viewed very favourably.

How Much Can You Borrow for Home Improvements?

The amount you can borrow when remortgaging for home improvements depends on several factors, including the value of your property, your existing mortgage balance, your income and your credit history.

Loan-to-value limits

Most lenders will allow you to borrow up to 85% or 90% of your property value when releasing equity for improvements. Some may go higher in certain circumstances, but you will generally get better interest rates at lower loan-to-value ratios. The most competitive deals are typically available at 60% LTV or below.

Affordability assessment

Lenders must ensure you can afford the increased monthly payments. They will assess your income, regular outgoings, existing debts and living expenses. Since the Mortgage Market Review, all lenders are required to carry out thorough affordability checks, and this applies equally when you are borrowing additional funds for improvements.

Income multiples

As a general guide, most lenders will offer between 4 and 4.5 times your annual household income. If you are borrowing jointly, both incomes can be taken into account. Some specialist lenders may offer higher multiples for higher earners or those with particularly strong financial profiles.

Practical considerations

While it can be tempting to borrow as much as possible, it is sensible to only borrow what you need for the planned improvements. Remember that any additional borrowing will increase your monthly payments and the total interest paid over the life of the mortgage. A detailed budget for your improvement project will help you determine the right amount to borrow.

It is also worth considering that the improvements themselves may increase the value of your property, which could improve your LTV ratio over time and potentially give you access to better rates when you next come to remortgage.

Which Home Improvements Add the Most Value?

Not all home improvements are created equal when it comes to adding value to your property. Understanding which projects offer the best return on investment can help you make smart decisions about where to spend your money.

High-value improvements:

• Loft conversions - Converting a loft into a usable bedroom or living space can add up to 20% to a property value, making it one of the most cost-effective improvements you can make.
• Extensions - A well-designed rear or side extension that adds living space can increase a property value by 10% to 20%, depending on the size and finish.
• Kitchen renovations - A modern, well-fitted kitchen is a major selling point. A quality kitchen upgrade can add between 5% and 10% to your home value.
• Bathroom upgrades - A new bathroom or en-suite can add 3% to 5% to a property value, and makes a significant difference to everyday living.
• Energy efficiency improvements - Insulation, double glazing, new boilers and solar panels can reduce running costs and improve your EPC rating, making your home more attractive to future buyers.

Moderate-value improvements:

• Garden landscaping - A well-designed garden can add kerb appeal and make the property more attractive, though the return varies.
• Garage conversions - Converting a garage to living space can add value, particularly in areas where parking is not at a premium.
• Redecorating - While fresh paint and new flooring may not dramatically increase value, they can make the property more saleable and appealing.

When planning improvements with borrowed funds, it makes sense to prioritise projects that will add value to the property. This way, your investment is working in two ways: improving your quality of life now and building equity for the future.

Bear in mind that the value added by any improvement depends on the local market, the quality of the work and how well the project suits the property. Over-improving a modest property in a lower-value area may not deliver the same return as similar work on a home in a higher-demand location.

Remortgage vs Other Ways to Fund Home Improvements

Remortgaging is not the only way to pay for home improvements, and it is worth considering all your options before deciding which route is best for your situation.

Remortgage (releasing equity)

The main advantage of remortgaging is that mortgage interest rates are typically the lowest available, often significantly less than personal loan rates. This makes it the most cost-effective way to borrow larger sums. However, you are securing the debt against your home, which means your property is at risk if you fail to keep up with payments. You will also be repaying the additional borrowing over the full mortgage term, which means you could pay more interest overall even though the rate is lower.

Further advance

Instead of remortgaging entirely, you could ask your existing lender for a further advance. This keeps your current mortgage deal in place and adds a second portion with its own rate and terms. It can be simpler and avoids early repayment charges on your existing deal, but the interest rate on the further advance may not be as competitive as what is available from other lenders.

Personal loan

For smaller improvement projects, a personal loan can be a good option. Loans are unsecured, so your home is not directly at risk, and they typically have shorter repayment terms of one to seven years, meaning you pay off the debt more quickly. However, interest rates are higher than mortgage rates, especially for larger amounts.

Credit cards

For very small projects, a 0% purchase credit card could be useful if you can repay the balance within the interest-free period. This is only suitable for modest amounts and requires disciplined repayment.

Government grants and schemes

Depending on the type of improvements you are planning, there may be government grants or schemes available, particularly for energy efficiency improvements. It is worth checking what is currently on offer before committing to borrowing.

The right choice depends on how much you need to borrow, the interest rates available to you, and your personal comfort with securing debt against your property. A mortgage adviser can help you compare the total cost of each option.

The Remortgage Process for Home Improvements: Step by Step

If you have decided that remortgaging is the right way to fund your home improvements, here is what to expect from the process.

Step 1: Plan your improvements and budget

Before approaching lenders, have a clear idea of what work you want to carry out and how much it will cost. Get multiple quotes from contractors and include a contingency of around 10% to 15% for unexpected costs. This will help you determine exactly how much additional borrowing you need.

Step 2: Check your current mortgage terms

Review your existing mortgage to understand whether you are still within a fixed or discounted period and whether any early repayment charges would apply if you switched to a new lender. If early repayment charges are significant, it may be more cost-effective to ask your current lender for a further advance instead.

Step 3: Speak to a mortgage adviser

A whole-of-market mortgage broker can search across all available lenders to find the best deal for your situation. They will assess how much you can borrow, compare total costs including fees and charges, and recommend the most suitable option. Look for an adviser who is authorised and regulated by the Financial Conduct Authority.

Step 4: Make your application

Your adviser or lender will guide you through the application. You will need to provide proof of income, bank statements, details of your current mortgage and identification documents. The lender will carry out affordability checks and a credit search.

Step 5: Property valuation

The lender will arrange a valuation of your property to confirm its current market value. This determines your loan-to-value ratio and the amount of equity available for release.

Step 6: Legal work and completion

A solicitor or conveyancer will handle the legal transfer from your old mortgage to the new one. This typically takes four to eight weeks. Once complete, the additional funds will be released and you can begin your improvements.

Many homeowners start the remortgage process around six months before their current deal expires, as most lenders allow you to lock in a new rate well in advance. This gives you time to plan your improvements and have everything ready to go when the funds become available.

Important Considerations Before Remortgaging for Improvements

Before committing to a remortgage for home improvements, there are several important factors to consider to ensure it is the right decision for your circumstances.

Will the improvements add value?

Consider whether the planned improvements are likely to increase the value of your property by more than they cost. While not every improvement needs to deliver a positive return, it is reassuring to know that your investment is enhancing your asset as well as your living space.

Can you afford the higher payments?

Increasing your mortgage means higher monthly payments. Make sure you have stress-tested your budget to ensure you can comfortably afford the new payments, even if interest rates rise or your income changes. Lenders will carry out their own affordability assessment, but it is wise to do your own calculations too.

Planning permission and building regulations

Some home improvement projects require planning permission from your local council, and almost all structural work needs to comply with building regulations. Make sure you have the necessary approvals in place before starting work. Carrying out work without proper permission can cause problems when you come to sell or remortgage in the future.

Insurance considerations

Major improvements such as extensions or loft conversions will affect the rebuild cost of your property. You should inform your buildings insurance provider about any significant work and update your cover accordingly. Failure to do so could invalidate your policy.

Choosing the right contractors

The quality of workmanship on your improvements will affect both the value added and your enjoyment of the finished result. Take time to research contractors, check references and ensure they have appropriate qualifications and insurance. For larger projects, consider using contractors who are members of recognised trade bodies.

Tax implications

If you let part of your property or use it for business purposes, some improvements may have capital gains tax implications. It is worth taking professional advice if your property use is anything other than a straightforward residential home.

Taking the time to plan carefully and consider all these factors will help ensure that your remortgage-funded improvements are a success, both financially and practically.