Home improvement loans give you two-way value

Let’s say you’ve found the perfect location for your new home but there are no good properties on the market. All you can find are fixer-uppers - properties in a “distressed” condition - but, if you renovate, you will have a great place to live. More importantly, money well spent is stored in the higher resale price your home will command. Alternatively, your existing home may now feel cramped with a growing family, or just need improvement. Moving to another house is not going to be easy given the present state of the real estate market, so enlarging or improving your own home is the best answer.

The first option is an unsecured personal loan. Most banks offer home improvement loans without having to tap into the existing equity (assuming you own a home and there is some equity available as security). If you have a good credit score, approval is fairly routine with modest interest rates. You need to pitch the project showing a design, a reasonably detailed costing of the materials required and estimates from builders, plumbers, electricians and their like for their labor. Most loans will be agreed in instalments so you can draw down as work milestones are reached. Thus, if you’re buying a fixer-upper, you need only take a mortgage for the price for the land and structure as is. Later when the work is completed, you can decide whether to consolidate the personal loan into the mortgage.

Alternatively, if you have sufficient equity in the building as collateral, you can get a home improvement loan either as a second mortgage or as part of a refinancing deal to pay off the existing mortgage and take cash out for the improvements. As with a personal loan, you need to have comprehensive plans and estimates. Always remember that all the money you invest in the structure of the home potentially adds to its resale value. If you spend most of the loan on furnishings, these will depreciate in value through wear and tear. When you borrow, you’re putting your home at risk if you find the instalments unaffordable. If you maximized the resale value, let’s hope you will have some cash left over after a forced sale. But if the resale value of your home has fallen too much, you may be looking at bankruptcy if you cannot pay off what is owing.