Spring and summer are unsurprisingly the busiest times of year in the home improvements calendar, when homeowners take advantage of the weather to renovate and repair their homes – or simply update them to add value to what is most people’s largest asset.
But knowing what to do is the easy bit: paying for it is a little harder! Figuring out the best way for you of funding that new kitchen or bathroom is a crucial first step: get it wrong and you could end up spending far more than you realised.
So what are your options when funding your home improvements?
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Can I pay for home improvements with a pension?
It may seem counter-intuitive to borrow money when you have a decent nest-egg, but it can make sense.
Why? Let’s start with your pension: it’s simply a savings scheme designed to give you an income in retirement. If you cash it in early, what will you use to maintain your lifestyle when you stop working?
Despite the recently introduced pension freedoms that allow some people to cash in their retirement pot once they reach 55, doing so is seldom a good idea. It means money earmarked for a specific purpose is no longer there.
Those who have cashed in may well regret it in a few years once they realise the full consequences of having less money available once they stop working.
If you need the money for an emergency, it can make sense. But are home improvements an emergency that mean it’s worth raiding your retirement money? Probably not.
Can I cash in investments or savings to fund home improvements?
If you’ve been stashing money away, investing for a rainy day or to build up an emergency fund, then is splashing out on renovations actually that rainy day?
Cash in your investments or savings and you’ll no longer have that emergency money to fall back on. There’s also the risk, of course, that you cash in investments at the wrong time when the value of your funds or shares is low.
Timing is always tricky when it comes to buying or selling investments; sell at the wrong time and you’ll curse your luck later. And if you’ve built up a decent nest-egg in savings accounts or ISAs, do you want to dismantle it now and not have the sum to fall back on in the future if you were to need it?
In short, whatever reasons you had for putting money into a pension and investments are likely still to be true, so scrapping them now could lead to regrets later.
Should I take out a loan to cover renovation expenses?
Borrowing can be expensive, so it’s important to find the most cost-effective way. Depending on how much you need, you may be able to get a 0% finance option from a kitchen supplier, for instance. But you have to be sure you can afford to repay the money quickly enough not to encounter extra costs.
If your plans are going to need a sizable sum – £10,000 or more – you should seriously consider a loan, which are available at low rates at the moment. However, those rates will vary, and the lower your credit score the higher a risk you’ll be considered and the more you’ll be charged for a loan.
The good news is that you can borrow well past 70 these days. Look for a loan that takes into account all forms of income, including pensions (some don’t), and a single flat rate of interest.
For smaller amounts, such as £5,000, you could consider a 0% credit card deal. The longest currently offered is 43 months but with a balance transfer charge of 3.29%, you’d have to stump up £164 and then ensure you paid the amount off within the period to avoid fresh charges.
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Can I take out a mortgage when improving my home?
Depending on your age and future income expectations, you may be able to take out a new mortgage to spread the cost of home improvements.
Some lenders have recently increased the age limit for mortgages to be paid off up to 85. Mortgages are cheaper than loans so could well be a better option, especially if you want repayments to be spread over more than five years.
However, once again, you’ll need to be able to prove you can meet strict mortgage criteria, including making the repayments out of income, which could prove more difficult the older you get.
The simple rule of thumb with borrowing money is that the sooner you can pay it off, the less you’ll be charged with interest. If you can afford to pay it off within five years or so, a loan would probably be the better option with mortgage lenders not too interested in such short-term loans.
Are you still paying off your mortgage?
Should I look into equity release to release renovation funds?
If you don’t want to repay the money until later, you could think about equity release – a term for ways to raise money from the value that’s tied up in your home.
One known as a lifetime mortgage allows you to roll up the interest and add it to the amount borrowed, so you repay nothing until the property is sold. Another way is to sell part of your home now, say 20%, with the company buying being handed 20% of the value of the property when it is sold.
Both have disadvantages and could hit inheritance plans or eligibility for benefits, so it’s essential to consider their pros and cons carefully and discuss your proposed plans with family.
Lifetime mortgages make up the majority of equity release plans but are a more expensive way of borrowing than normal mortgages or loans. Because the loan is not repaid until you go into care or die, the interest simply mounts up, and is probably not the right choice to release small to middle sized sums..
For that reason you should talk to an expert, such as an independent financial adviser, before signing anything. Moreover, you shouldn’t consider cashing in a pension or investments without talking over your plans with an adviser.
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