How to pick the right loan for your renovation

What you need to know when choosing your loan for a renovation

most high street lenders will only offer a mortgage on a property that is already considered habitable — stopping many renovation projects in their tracks. However, if you are extending or renovating your current home you should have no problem with this hurdle.

Renovation costs can be quite expensive, and funding them between payments and salaries often involves using credit from suppliers, loans and savings. An alternative is to use a specialist lender that offers stage payments in advance.

How much can I borrow?

The amount you can borrow is normally calculated by your income, or your joint houshold income. Most lenders will also take a look at your disposable income after your existing commitments such as rent and other loan repayments and take this into account. It is worth noting that if you are self-employed you will likely find it harder to borrow the amount you are looking for purely because self-employed workers are often viewed as less reliable compared to borrowers who are employed by a business. If you are self-employed try approaching a broker to find the right lender for you - you may be surprised what you could borrow when referred to the right lender. If your credit history is adverse approach an advisor who can match your needs and situation to a lender who can help you.

How do I find a deposit?

The majority of renovators will use a mortgage that advances between 66% and 90% of the value of the property, so you will need to find funds from other sources for the remaining balance of the market value purchase price, survey fees, design fees, purchase costs and the funding to get the renovation started. Typically you will need between 15% and 20% of the total budget of your renovation to get your project started. This deposit can be funded in a few ways; savings, the sale of assets and borrowing.

Re-mortgage: If you are a homeowner or own another property the quickest and most efficient way of borrowing funds for a renovation of extension is to re-mortgage. Before doing this it's really important that you understand all of the charges, penalties and small print for repaying the advance early AND the procedures if you miss repayments. Missing repayments can end with your home being repossessed meaning your hard work and your home will be lost. Always over budget.

Bridging Loan: If you have enough equity in your current property to fund the renovation and you do not want to remortgage you can use a bridging loan. A bridging loan is very easy to arrange than an advance or mortgage particularly if you are on a modest income./p>

Personal Loan: If you have no savings, assets and you do not own a property a personal loan is the best way to go to get your deposit. This is a more expensive way to borrow so the best mortgage lender is the one that offers the highest possible loan up front to minimise your interest payments.

Some banks will grant extended overdrafts to facilitate your loan. This is quite an expensive way to borrow — usually more expensive than a personal loan, so be aware of this before taking one out.

Credit cards can end up being very expensive unless you pay back the outstanding amount monthly. Only take out a credit card if you are sure you can make these repayments or you will spiral into debt quite quickly.

Accelerator Mortgage: Another way of borrowing at an affordable rate is to use a renovation mortgage product with an advance stage payment facility. This allows you to borrow stage payments to fund renovation work in advance. Such products can improve your cash-flow position, although they can carry a considerable arrangement fee.

Borrowing Tips

Arrange the funding first:  Make sure you approach lenders before you start looking for a renovation — arranging finance can take weeks, sometimes months. When you have your funding in place and you come across the right opportunity you can act quickly.

Never go for one of the first lenders you approach - have a look around to find the best deal. Keep a record of all the fine print in a comparison table so you can easily choose the best deal. The best lender will be the one that accepts your income status and offers good multiples; so the lender that advances the highest percentage of the market value of your home as it stands. Make sure you take all fees into account and early repayment penalties

Use credit facilities: Extend free credit by taking out trade accounts, and arranging payment in arrears. BuildStore customers can apply for a TradeCard that gives them £15,000 credit for materials.

Don’t pay too much tax: Some renovation work is eligible for VAT relief, especially on empty homes, conversions and properties where there is a change in the number of units.

Written by Emily Stone