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Why Take a Secured Loan for Home Improvement?

There are many reasons why people borrow money, and just as many ways in which to do so. Common borrowing purposes can basically be divided into two categories. The first would cover things such as buying clothes and other purchases on credit cards, using store credit, and taking advantage of buy now pay later or other store financing offers, or perhaps borrowing to pay for a holiday.

All these purchases would broadly come under the heading of expenditure loans. You are borrowing money and spending it on things for your immediate enjoyment and benefit. There are other loans however, that are more commonly used for more investment type purchases. This would include taking out a mortgage to buy a house, using student loans to pay for education, or even using a loan to pay for a car.

These investment type loans are used to pay for something that will give you a prolonged period of enjoyment over a number of years. Taking out a loan to pay for home improvements is one such loan. While it will take a number of years to repay the loan, the benefit and enjoyment from the home improvements are also likely to last for many years into the future.

This type of loan is becoming very attractive as property prices continue to rise. As your house increases in value, it becomes worth significantly more than the amount you borrowed to buy it. Therefore, you are in a position of what is known as positive equity. Banks will be happy to lend you money, at good interest rates and on good terms and conditions, in exchange for securing the loan over the extra value of your home. This means that you can get very attractive loan terms and interest rates because your loan will be a completely secured loan over the property and therefore represents very little risk from the perspective of the bank.

More Reading: Home improvements - be careful where you borrow!

Using the loan for home improvements can also be a very wise investment. With property prices consistently out performing many other types of investment, it makes a lot of sense to try and increase the value of your property further by investing in home improvements.

The analysis shows that five thousand invested in home improvements can frequently be turned into a gain, on the increase in value of the property of eight thousand or more. This would be a return on investment of some sixty per cent. When you compare this to what you are paying for the loan, which will be more in the region of five or six per cent, then taking out the loan seems less and less like an expense and more and more like a great opportunity to be taken advantage of.

Estate agents frequently list interior decoration, especially in the kitchen and bathroom, as one of the biggest assets when trying to secure a good price for a home on the market. Or if you are extending the house, this will obviously allow you to seek a higher price for your property. As long as you get all necessary planning permission and permits, and use respected and qualified tradesmen and builders, you should be able to significantly add to the value of any property by investing some money in improvements.

There are some people who should be cautious however, before going down this route. There are areas of the country where property is not doing quite as well as the average, and in such areas, it may be harder to realise a profit from improvements you make. Also, sometimes with very high end properties that are already fetching high prices on the market, there may be less room for adding value through improvements, or even if you do add to the property significantly, say be adding a heated indoor swimming pool and sauna, it may be very difficult to find buyers who are able to afford to pay you for these investments, no matter how desirable they may be. There is also the issue that interest rates can always rise, which means that if you already are financially extended in meeting your mortgage repayments, then the extra costs of the home improvement loan may be more than you can bare.

More Reading: Home Equity Line of Credit - For those with good credit, a mortgage in decent standing, and a relatively (depending on the bank's definition) sizeable difference between a home's worth and the balance of a mortgage, a home equity line of credit may be a good option for those needing a loan

Becoming unable to meet your repayments is a very serious concern, as home improvement loans will invariably be secured over your home. This means that you will be putting your house at risk if you fail to keep up with repayments. Securing a loan over property gives the lender a direct right to seize that property in satisfaction of their debt if you become unable to meet your repayments for whatever reason. While there are insurance policies that can protect you against this, these will usually only pay out in a very limited range of circumstances and are difficult to rely on fully. Therefore, consider carefully whether you can afford the repayments before taking out the extra loan.

More Topics:

  • Home improvements - be careful where you borrow! - How have Britons financed the billion of pounds spent on home improvements this year? Mostly through personal loans, although other forms of payments have been used as well.
  • Home Equity Line of Credit - For those with good credit, a mortgage in decent standing, and a relatively (depending on the bank's definition) sizeable difference between a home's worth and the balance of a mortgage, a home equity line of credit may be a good option for those needing a loan
  • Refinancing a Mortgage - It's very easy to sign mortgage papers and forget all about the details of the loan. As long as the monthly payments are made, many people don't give their mortgage much thought. However, as the economy fluctuates, mortgage rates do also, and substantial cost savings over the life of mortgage could be realized by refinancing.
  • Mortgage Approval with Bad Credit - Do you want ot buy a home but have been refused? This article explains some of the options that you have to get accepted.
  • Mortgage Terms: What is the Best Length? - How long would you like you mortgage to run? The simple answer would be as quickly as possible, but not everyone can, which means higher repayments and more strain on the household budget.
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