Is a mortgage supplement or personal loan the best option for financing home renovations?
We are looking to do some work on our house (about €30,000) and are trying to find the best way to finance it. We have equity in our home: our mortgage has €380,000 outstanding with 30 years remaining on a house valued at €650,000.
This is our forever home so we will never sell it. Are we better off adding to our mortgage or trying to make a personal loan work for a shorter period?
Ms. SM, e-mail
You may have heard me say many times that a mortgage is the cheapest money you can get – and it’s true. But whether this is still the best option for top-up loans depends on both your discipline and the nature of your existing mortgage.
You plan to invest a reasonable sum in your home but, since you consider it your “forever home” and this investment will likely allow you to make adjustments that will make it even more suitable for your everyday life – or energy efficiency, it seems like a good investment.
You should be able to get a mortgage rate of around 2.2% or less from your current mortgage lender, no matter who it is.
Determining how best to fund this work is a sensible first step. I guess all options are open given the equity you have in the property and no information from you that there is anything that could undermine your credit report.
Obtaining an additional loan on the mortgage should certainly be possible. Adding €30,000 to your current mortgage would bring the loan back to a value above the 60% ratio below which the best deals are available, but not by much, just slightly above 63%.
Cost of credit
You should be able to get a mortgage rate of around 2.2% or less from your current mortgage lender, no matter who they are. If you can’t, you should probably consider switching mortgage lenders anyway, regardless of financing the home improvement project.
According to bonkers.ie, you should be able to get as low as 1.9% with the Bank of Ireland four-year green rate.
Either way, at 2.2% you would pay $1,552 and change your 30-year top-up mortgage by $410,000 per month. This is an increase from the €1,438 you would pay at the same interest rate for your current home loan of €380,000.
So that’s a very manageable monthly increase of €132.58. However, as you are repaying the €30,000 over the 30 year term of the mortgage alongside your existing mortgage exposure, the cost of the loan in terms of interest payments – known as the cost of credit – would be slightly lower. at €10,888.
If you were to go the personal loan route, the cost of credit will depend on how long you want to repay the loan.
If you were to consider a five-year term, a loan repayment calculator provided by the Competition and Consumer Protection Commission (CCPC) indicates that your best option would be the Green Home Improvement Loan. ‘An Post Money. With an interest rate of 4.9%, you would repay the loan at €563.30 per month and the cost of credit for you over the five years would be €3,798, or about a third of the mortgage option described above.
If you cannot afford the monthly payment of €563.30, you can take out the loan for a period of 10 years with Avant. The monthly repayment would drop to €329.25, but since the interest rate is higher, at 5.9%, and the repayment term longer, the cost of credit to you on the loan would be €9,510, which is not far from the 30-year mortgage option.
You could reduce the cost of credit to around €2,268 by opting for a three-year loan – still the An Post Money option – but that would involve monthly repayments of €896.35.
If you are on a fixed rate, there will be rules about what additional payments you can and cannot make
Of course, the cheapest option would be to link the loans to the mortgage but to speed up the repayments. This way, you benefit from the mortgage interest rate of 2.2% without delaying repayment over the next 30 years.
If you decided to pay it off within five years – paying an additional €527 per month on your ongoing mortgage payments – the cost of credit would drop to a modest €1,630 or so.
If you are on a fixed rate, there will be rules about what additional payments you can and cannot make. Some mortgage products allow certain accelerated repayments – usually the odd lump sum payment up to a certain maximum percentage of the outstanding balance; Others don’t.
If your loan is a fixed rate loan without the possibility of increased repayments, you can simply deposit the amount you wish to repay, monthly or otherwise, in a separate account and transfer it to the mortgage account at the end of your fixed repayment period. In progress. period and before locking in any other fixed rate. The cost of credit would be slightly higher at €1,630 but still much lower than personal loan options.
It all depends on how disciplined you are willing to really be.
Please send questions to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email [email protected] This column is a reading service and is not intended to replace professional advice