Home improvement loans prove costly mistake

People thinking of borrowing money to fund home improvements could be wasting as much as £2,130 by opting for a homeowner loan.

This is because banks charge home improvement loans at their standard variable rate, which can be as much as 2.13 per cent more expensive than their best mortgage deals, figures from comparison site moneysupermarket.com reveal.

And with 42 per cent of homeowners considering extending their property, taking a homeowner loan rather than remortgaging could be costing Britons as much as £17.89 billion.

"Moving house is often a daunting step and in times like these people are likely to want the security of staying put," said Louise Cuming, head of mortgages at moneysupermarket.

"Before making any decisions it is important that homeowners weigh up all the costs involved before they start looking at properties, drawing up improvement plans or speaking to their existing lender.

"A careful assessment of their situation means they could save themselves a lot of money if the decision is to improve – perhaps even enough to pay for new furniture to go with the new renovations."

But caution is urged, as add-on fees for mortgages can cancel out the benefit of being charged less interest, and mortgage debt will typically take longer to pay off than a homeowner loan seeing interest charged for longer.

But these are not insurmountable problems.

"Many lenders have really simplified the remortgage process so associated costs can be minimal, with products offering free valuation and legal fees for standard transactions," Ms Cuming explained.

"And remortgaging to a larger loan incorporating an allowance for home improvements could work out more cost effective even after mortgage exit fees.

"Not only will the remortgage save you money in the short term but the home improvements should increase the value of your property for when you do want to move."

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