Houses and Credit

The property market has taken a battering in the last five years, once a sure investment that ‘couldn’t fail’ it promptly ‘failed’ and dragged a whole lot of people into financial difficulty when house prices dropped by over 30%.


Now, however, things have stabilised and mortgages are cheaper than they’ve ever been, but, if you’re looking to do a little (or a lot) of home improvement, is a mortgage the right way to go, what are your other options, and how to go about achieving them?

The first recommended step is to check out your credit report online through a company like CreditExpert, whenever you’re applying for credit (or considering doing so) it’s worth out knowing your rating before you get started.

Now, there are three options of financing home improvement, a personal loan, a credit card, or a mortgage, each have their own advantages and characteristics that will determine what’s best for you.

Credit Card

Despite the reputation, if you’re clever and have a good credit rating to begin with, a credit card is the best way to borrow relatively small sums of money. Usually you can make the most of interest-free deals and shift the debt around making it the cheapest to pay off. However, if you’re planning something really big, a credit card is risky because if you get caught with the debt at the end of a debt-free period and can’t move it (which becomes harder the bigger your debt) it could get very expensive.

Personal Loans

In theory personal loans fill the gap between a credit card and a mortgage, however, in most cases they’re not a great idea. They’re not hugely flexible, the interest rates are good but the terms are often long so you end up spending a lot anyway, and they may have early repayment penalties. However, if you’re investing in a property and you intend to enjoy it for 10 years, a personal loan is a good option, if you’re likely to move on, its probably not.

Mortgage

Mortgage credit is the cheapest, but also carries risks if, for example, the housing market falls again and you don’t have a lot of equity stored up. However, as renovation tends to increase the value of your house, borrowing through a mortgage is perfect because you will hopefully create more value in your house than you will spend, thus giving you net higher equity. If you’re doing up a house to move it on, a mortgage is the best way to go, and if you’re not sure about threading a path through all the complicated options, either get an independent advisor, or spend a lot of quality time with a mortgage calculator.

Image: renjith krishnan