Want to see a real client experience with this before reading the blog ?
The cheapest way to finance that home office
WFH. Adding an office to your house after the Covid experience. Home Improvements. Building an extension. A new bedroom. Making your home more energy efficient. Covering educational expenses. Or maybe paying off high-interest rate personal loans?
You know what you want to do so how do you get the money?
Check the freebies first
The first step is checking out whether you might qualify for a home improvement grant. This may be the case particularly if you are making your home more energy efficient. Check out the link here : https://www.citizensinformation.ie/en/housing/housing_grants_and_schemes/home_renovation_incentive.html
Nope, I need to raise some money
Another option is getting a personal loan. The rate on personal loans is 10-14%. Credit unions are cheaper and a typical average rate is about 7%. But financing via a mortgage top up will be by far the cheapest : at 2% or 3%.
Mortgage top up - how does it work ?
Consecutive years of house price rises means people have more equity in their homes. Let's take an example! The value of your property today is €410,000. This is an increase from when you bought it.
One prominent lender in the market will allow you borrow up to 85% = €350,000. Others will allow 80% and some, up to 90%. But anyway, let's work with 85% for now.
Suppose your current mortgage outstanding is €300,000.
There remains €50,000 (€350,000 - €300,000) as a potential mortgage top-up. Can easily cover the likes of an office at home as our working patterns change during and after Covid.
But didn't I read that I end up paying more interest in the long-term ?
This is an interesting one. Look at the following choices
1. Borrow €10,000 at 10% and repaying over 2 years Monthly : €471
2. Borrow €10,000 at 2.5% and repaying over 25 years Monthly : € 44
The first choice is the personal loan option - costing €471 per month. The second is more like a long-term mortgage repayment - costing €44 per month. It doesn't seem like a difficult choice ! However, because the term of the 25 year borrowing is much longer, we end up paying more in total interest over the life. Approximately €1,000 extra in interest. It does not mean it is worse but everyone should be aware of this !
Can I do anything about this ?
Yes, you can ! You can choose the term for repayment of your mortgage top-up. The shorter the term, the less we pay in total interest. Also, some expenditures will just be more suited to short-term borrowing whilst others will be suited to longer-term.
In terms of interest rate and monthly payment, mortgage financing is the cheapest way for me.
So will I just go to my mortgage lender ?
I mean - you could. They will probably charge you a valuation fee to get an up to date value on your home. Legal fees may also apply.
But why go to the same shop when there are so many other shops in town? The chances of your lender being the cheapest is very small indeed. You are going through the process of an important financial transaction so you should do it right. There may be lots of money to save !
So I can go to a different lender for a top up ?
Yes, yes, yes. Your bank wants you to top up your mortgage with them. Of course they do ! There is still a little bit of a mental block about banks and mortgages. I think it is a residue from the old days where people tended to approach the bank they have used for years to get the mortgage. The market has changed. This loyalty is not rewarded !
In fact, the opposite is often true. You can be punished for your loyalty. Your bank may be one of the most expensive on the market. If your mortgage has been around for the time sufficient to build up enough equity for a top-up, the chances are you are on an old expensive rate. Shop around - there are huge savings to be made !
To go back to the example above, we would get a new mortgage with the cheapest provider for €350,000. Repay the mortgage from our expensive borrower for €300,000. Then the remaining €50,000 is available for our home improvements, extension .. etc
And it may even be possible to top up your mortgage with a new lender and save money !
Serious ? Mortgage rates have fallen over the last years. If it is a few years since you got your mortgage and you are with one of the more expensive lenders, it may be possible to refinance your mortgage, take out money and reduce your monthly cost !
In our example, the borrower currently has a mortgage of €300,000, 25 years, at a rate of 4.50%. It is possible to move to a new mortgage of €350,000, 25 years, at a rate of 2.25%. Even though we have borrowed an extra €50,000, our monthly payments fall from €1,667 to €1,526 !!!!! Yes, that is a pretty happy outcome.
This scenario may not always be possible but there is a high chance that as well as getting a top up on your mortgage that you will also be able to save some money by going to a new lender. It will not necessarily pay fully for the top up but it may contribute towards it. Speak to us at AM Financial and we will outline how the numbers can stack up for you !
AM Financial
Yes, serving customers on the north side of Dublin. So no matter where you are on the DART line. AM Financial is a mortgage broker serving clients in Clontarf, Killester, Harmonstown, Raheny, Kilbarrack, Bayside, Sutton, Howth, Clongriffin, Portmarnock or Malahide.
Other things I need to know ?
The obvious things like this will work as long as you have been current on your mortgage payments. There may be a minimum top up amount lenders will look at - e.g. €25,000. Some will only pay 90% of home improvement works. There are some conditions but come and speak to us and we can go through anything that is relevant to your case.
Anything else ?
You will also need to top-up your mortgage protection insurance for the extra amount. This may be a good time to ensure you are getting the best deal on your mortgage protection.
That's it ?
Yes, you can go back to your home improvement plans. Come to us and we'll help you with the finance side !