How can homeowners on low rates fund home improvements without jeopardising their affordable repayments? Ryan McGrath says a secured loan could be the answer…
In today’s economic climate, with the Bank of England holding rates at 5.25%, homeowners find themselves caught in an unexpected predicament.
The combination of continually high interest rates and previously secured low mortgage rates has created a scenario where many are hesitant to borrow money to fund home improvements or to consolidate debt.
This reluctance to borrow stems from an inaccurate belief that doing so will jeopardise the existing, more favourable, mortgage terms they have on their main mortgage.
How interest rates have impacted homeowners and moving
Historically low interest rates in recent years allowed many homeowners to lock into exceptionally affordable mortgages.
However, as the economic tide has turned and interest rates have climbed, some homeowners who need to upsize or long for a different home set up simply do not want to keep holding off in the hope that rates come down.
So, what options do homeowners have when they want, or sometimes need, to make home improvements?
This is where secured loans can come in.
At its core, a secured loan allows homeowners to borrow money against the equity they’ve built up in their home, all while preserving favourable existing mortgage terms.
Understanding secured loans
Secured loans, sometimes also known as homeowner loans or second charge mortgages, provide homeowners with a genuine alternative to credit cards or unsecured personal loans. Depending on their circumstances and needs, they might be more flexible, affordable or simply a savvier way of managing their money.
So, who should consider this option for home improvements? These loans are particularly attractive to those on a low interest rate first charge mortgage which they don’t want to re-negotiate on (as mentioned above).
Raising awareness of secured loans
Our Specialist Lending Study found that if homeowners wanted to raise funds through additional borrowing secured on their home, the majority (57%) currently don’t know how they would do so and just 12% would consider a second charge mortgage.
As an industry we must help to grow awareness of alternative finance products such as second charge mortgages, that homeowners simply don’t know enough about to meaningfully consider right now.
Using secured loans for home improvements
One of the most popular uses of second charge mortgages is to fund home improvements, a trend that has risen exponentially in recent years.
Indeed, recent figures from the Finance & Leasing Association (FLA) indicated a 13% uptick in new business volumes for secured loans in April for home improvements alone.
The surge in home improvements across the UK can be largely attributed to the increasingly prohibitive costs of moving house. With soaring property prices, hefty stamp duty fees, and a lack of affordable housing stock, many find themselves priced out of the property ladder or unable to upgrade to larger homes.
As a result, homeowners are turning to renovations and extensions as a more affordable alternative to moving. By improving their existing properties, they can create additional living space, modernise outdated features, and increase the value of their homes without incurring the substantial costs of purchasing a new property and taking out a new mortgage on a potentially undesirable rate.
This trend has been further accelerated by the rise of remote work, which has prompted many to adapt their living spaces to accommodate home offices and multi-functional areas.
Consequently, the home improvement sector has experienced a boom, with homeowners investing in everything from loft conversions and kitchen remodels to garden offices and energy-efficient upgrades, all in an effort to make their current homes more suitable for their evolving needs.
But the repercussions of this trend are far-reaching and it’s important that homeowners know that they have more options than they may think in order to make their renovation plans a reality, even in a high interest rate environment.
In conclusion, as we navigate this complex economic landscape, it’s important that as an industry we continue to educate consumers and develop competitive products that don’t hold people back. There is a genuine way forward where homeowners can hold onto their low-rate mortgage and fund their home improvements in an affordable way.
Ryan McGrath, director of Second Charge Mortgages at Pepper Money
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