Is a Renovation Mortgage better than a Remortgage?
A common question we get when our clients are looking to do a major home renovation is how they can best finance that. With the option of both a renovation mortgage or a remortgage, it can be difficult to understand which is the right path for you to take. And the answer isn’t always straight forward. It depends on a number of factors like the size of your renovation and how much equity you have in your home.
Mayflower Mortgage helps clients make this decision by breaking down their options so they can pick the best solution for them. So, if you’re also struggling with this choice, then we’ve written this blog post to help you understand how both of the options work, the pros and cons to each, and how you can decide which option suits your needs.
If you need personalised advice, visit our Renovation Mortgage page or book a call with our team of our experts.
What is a Renovation Mortgage?
A renovation mortgage is a loan that’s specifically designed to finance home improvements. It covers renovations like extending your home, refurbishing certain parts of it, or upgrading the actual home structure.
You can get a Renovation Mortgage to secure additional borrowing against the expected end value of your property rather then the current valuation , instead of using personal savings or credit cards. This means you don’t have to have all the money upfront and will help you to spread the cost over a longer period of time.
How does a Renovation Mortgage work?
A Renovation Mortgage still works similarly to a traditional mortgage, but is tailored to fund home improvement projects. This means:
Lenders assess your property’s current market value and the estimated value post renovation to determine how much you can borrow.
The funds may be released in stages, depending on the scope of your plans.
The loan can be structured as a further advance, a second charge mortgage, or a specialist renovation mortgage product.
It’s often the preferred choice for homeowners who are carrying out significant improvements that will increase the value of their property. There’s a large range of lenders that do offer this mortgage, so if we work together to assess whether this is the right option for you, then we can also connect you with the most suitable lenders for your situation.
What is Remortgaging for home improvements?
Remortgaging involves you switching to a new mortgage deal that will have a higher loan amount than your current mortgage. This means you can then release equity from this bigger mortgage to finance your renovations.
When does Remortgaging make sense?
Remortgaging can be a good option for you if:
You’ve built up substantial equity in your home and can borrow against that.
You want to merge your borrowing into a single mortgage payment rather than taking out another loan.
You can get a lower interest rate than your current mortgage deal.
However, it’s not always the best choice. We often advise clients against remortgaging if they’re locked into a fixed rate mortgage with high early repayment charges, or if their household income has decreased since their original mortgage application.
We’ll always recommend that you speak with an expert before making a decision, due to the decision being very dependent upon your personal circumstances. You can then properly discuss the costs and benefits of remortgaging vs. a renovation mortgage for your own situation.
Key differences between a renovation mortgage and remortgaging
Some of the big differences to note between Remortgaging and a Renovation Mortgage include:
Both options have their advantages, but the right choice for you will depend on your situation. If you’re not suer which is right for you, then get in touch with us for a no-strong-attached consultation.
Pros and Cons of a Renovation Mortgage vs Remortgaging
Pros of a Renovation Mortgage:
Suitable for larger scale renovations that require staged payments.
Can be structured in a way that allows borrowing based on future property value.
Helps maintain your current mortgage deal if you’re on a low interest rate.
Cons of a Renovation Mortgage:
Interest rates may be higher than standard mortgages.
The application process can be more complex and requires lender approval of renovation plans.
Pros of Remortgaging:
Potentially lower interest rates if you’re switching to a better mortgage deal.
Consolidates borrowing into one monthly payment.
Access to larger borrowing amounts if you have significant equity.
Cons of Remortgaging:
You might have to pay early repayment charges on your current mortgage.
Could result in higher monthly payments if you’re borrowing a large amount.
If the property values drop, you could end up in negative equity.
What do lenders look for when approving a Renovation Mortgage or a Remortgage?
Lenders have different requirements for a renovation mortgage vs remortgaging. We recommend understanding what they would look for in an application to help you narrow down your options and to improve your chances of securing your finance.
For a Renovation Mortgage:
A renovation mortgage is assessed differently to a standard mortgage by lenders as they’ll need to make sure that the project is manageable both financially and physically. They’ll consider things like:
The estimated post-renovation value: Lenders will evaluate what your home is expected to be worth once the renovations are complete. This’ll help them to make sure your investment is sensible and that the final value will support your loan amount.
A detailed renovation plan: You’ll need to breakdown your renovation plans so that lenders can see how your project is well thought out and financially sound. This’ll include things like estimated costs, timelines, and listing the contractors involved.
Planning permissions and approvals: They might require confirmation that planning permissions have been granted if any structural changes or extensions are being carried out.
Your financial standing: Similarly to a standard mortgage, your income, credit score, and existing debt obligations will all be considered to decide how much you can afford to borrow.
Staged release of funds: Most renovation mortgages release funds in phases. This means you’ll need to demonstrate that work is progressing in line with your plan in order to receive the additional funding at each stage.
For Remortgaging:
In most cases remortgaging is a more straightforward process. But lenders will still closely examine key aspects including:
The amount of equity in your home: It’s easier to secure additional borrowing if you have more equity in your home. You can typically borrow up to 80-85% of your home’s current market value.
Your loan-to-value ratio (LTV): This is the percentage of your home's value that is being borrowed. Generally, a lower LTV helps you to secure better mortgage rates.
Your credit history and income: Lenders check your credit score and income consistency to weigh your ability to afford the new loan amount.
Your existing mortgage terms: If you’re currently on a fixed-rate mortgage, lenders will look at if early repayment fees will apply and how these will impact your borrowing options.
Hidden costs to look out for when financing your home improvements
Lots of our clients overlook additional costs they’ll face in their renovation, and this can lead to unexpected expenses and rising overall costs. It’s very important to budget for these before you decide on your financing option so that there’s no hidden surprises.
For a Renovation Mortgage:
A renovation mortgage involves more than just securing the loan amount. Extra costs that could arise include:
Surveyor fees: You’re likely to be asked for a surveyor to assess the current condition of the property and the projected post-renovation value. Depending on the scope of your renovation, this report can cost anywhere from £300 to £1,500 or more.
Lender arrangement fees: Some lenders charge what’s called an ‘arrangement fee’ to set up your mortgage. In our experience this can range from £500 to £2,000.
Unexpected structural issues: Lots of our clients discover hidden problems like faulty wiring, damp, or foundation issues once their renovation work begins, so we recommend having a buffer in your budgeting to account for this.
Interim accommodation costs: If your renovations will require you to temporarily move out then make sure you’ve factored in rental accommodation or storage costs for your belongings.
Interest payments during construction: You might need to make interest-only payments on the drawn down amounts until the project is completed if your Renovation Mortgage releases funds in stages.
For Remortgaging:
Equally for remortgaging, there are some costs that our clients don’t always anticipate. Such as:
Early repayment charges: You can face an early repayment fee if you try to remortgage before the end of your fixed rate mortgage term. This can be as high as 1 to 5% of your outstanding loan.
New mortgage product fees: Some lenders charge setup fees for a new mortgage product, ranging from £500 to £2,500.
Legal and valuation fees: Similarly to a traditional mortgage, a remortgage can require a property valuation. Some lenders do offer free valuations as part of the deal but not always.
Higher monthly repayments: Your monthly mortgage payments can increase if you borrow a bigger amount. You’ll need to make sure that you can afford this new repayment amount.
At Mayflower Mortgage, we’ll help you to identify and plan for these costs so that there are no hidden surprises. When we start working together we’ll provide you with a full cost breakdown and help you to choose the best financing option for you.
What’s the best option for you, a Renovation Mortgage or a Remortgage?
Choosing the right financing for you will help you to make sure your project runs smoothly, and can impact your overall renovation outcomes.
If you’re planning a big renovation, then a renovation mortgage could be your best option. This is because it’s designed to cover home improvement costs and offers flexibility with your funding.
But if you’re planning a smaller scale renovation and have enough equity in your home, then remortgaging could be a more straightforward and cost effective choice for your project.
Key takeaways:
A renovation mortgage is ideal for major home improvements that add long term value.
Remortgaging can be a good option if you have substantial home equity and want to consolidate borrowing.
The best option will depend on factors like your financial situation, home value, and renovation goals.
If you’re considering a renovation mortgage or remortgage for your project, then the good news is that we can guide you through the process and help you make the right decision for your set up. So if you're still unsure which financing option is right for you, we can help. Visit our Renovation Mortgage page to learn more, or book a free consultation with one of our mortgage experts today.