The Pros and Cons of Using Secured Loans to Fund Home Renovations
A home renovation can provide tremendous benefits to the people who own, or live in, the home in question. A new kitchen, for example, can make a big difference to the way you enjoy mealtimes, while converting a garage into an office can allow you to be more productive at home. These changes will not only confer direct benefits – they’ll also help to drive up the value of your home.
For this last reason, you might be tempted to take on more debt in order to finance the changes. After all, in the long run, you’re probably going to get the money back.
One popular option is a secured loan. But how do secured loans work, and are they the right choice for your renovations?
Understanding Secured Loans
A secured loan is a loan that offers the lender the right to claim a particular asset in the event that repayments aren’t made. This loan is said to be secured against the asset, which might consist of a car, a watch, or an antique. The mortgage with which most homeowners bought the home in the first place is a form of secured loan – one secured against the home itself.
Benefits for Home Renovations
Since the lender is taking on less risk in this situation, they might be tempted to lend more money at a more favourable interest rate. This means that you’ll have a larger budget to get your renovation done. You’ll be able to do what’s right for the project, rather than what’s right for your limited, short-term budget.
Risks to Consider
The most obvious risk is that you’ll be unable to make the repayments, and the asset ends up being repossessed. If you want to stop this from happening, it’s crucial that you budget carefully, and that you form a plan for making repayments.
There’s also the risk that the asset in question might be lost or damaged, in which case the lender won’t be able to claim it. Secured loans also tend to have a longer repayment period, which could mean that you pay more overall – unless you settle early.
Opt for a variable-rate loan, and you’ll also be tied to the Bank of England’s base rate. This could rise or fall, depending on the rate of inflation across the country.
Long-term Value of Renovations
The reason that secured loans are a natural choice for renovations is that you might be able to bolster the value of your home through them. If you’re securing the loan against the home itself, then you might find that everything ultimately balances out. If your new kitchen costs you twenty thousand pounds, but adds twenty-one thousand pounds to the value of the property, then the loan is a sensible investment – especially if you intend to sell quickly.
Just be sure that the margin is generous enough, and that you have room for error.