FOOL'S EYE VIEW
Financing Home Improvements

By Jane Mack (TMFJane)
September 16, 2003

A few weeks ago, just before all the building work started for my home improvements, a friend made a Statement of Fact about the whole business:

"It's a nightmare", she said.

Fools, without a shadow of a doubt, 'tis true.

For anyone who is about to embark on major building work on their home, hold the thought in your mind that it'll be worth it in the end but be aware that there will be many dreadful moments along the way when you'll be in absolute despair about the escalating budget, the increasing mess and the disappearing builders. The process of improving and upgrading your home is not fun at all.

The thing that has been getting to me the most is the finances. We thought long and hard about what we wanted to do with the house and how much we were prepared to spend. Then we had to find the money. What were the options?

Use savings: We had about half of our proposed budget in ready savings - that is to say in an easy access high interest savings account. I say 'had' because it is all now in the builder's pocket! Although we could have financed the work in its entirety by raiding our Cash ISAs we decided against it for two reasons. The contents of our Cash ISAs are for an emergency – the sort of emergency that would cover us throughout a period of unemployment or illness for example, and we didn't want to remove that safety net if we could help it. The second reason is that the interest on our cash is protected from tax inside the ISA and we wouldn't be able to get that money back in its tax-protected wrapper once we'd saved up our emergency fund again.

Use a personal loan: These are reasonably cheap these days with the best value loans charging interest rates of less than 7%. They're relatively uncomplicated and if you go for a flexible loan which enables you to overpay as and when you can afford it, you'll pay even less in interest. However, I wasn't keen on the idea because there are other ways of borrowing money that are much cheaper.

Use a 0% credit card deal: This was my favourite plan because it meant we could borrow money for free! Indeed, we proceeded on this path by getting a 0% deal which covered new purchases and balance transfers and duly received a handful of blank cheques for the latter. We promptly made out a cheque to ourselves and put half the credit limit into the bank to use as ready cash to pay the builders and starting spending the rest on things like a bathroom suite, carpet and decorating materials.

We calculated that we would be able to pay about 70% of it back before the six-month deal was up and then transfer the remainder to another 0% card for a few more months after that.

However, our spending spree via this method came to a crashing halt last week when halfway through the building work I realised that I did not have the right temperament to play the credit card game. I absolutely hate the fact that I have a £5,000 credit card debt. I've been writing about how people can get out of debt for so long, it horrifies me that I have deliberately got myself into it even though it's for a worthwhile purpose. I honestly can't bear it and have had sleepless nights as a result.

So we've gone for the final method of paying for the building work.

Increase the mortgage: I appreciate this is still debt and that we'll being charged interest on it. But I'm consoling myself with the thought that we've been over-paying the mortgage for some time now and can comfortably increase our overpayments by even more. My plan is to treat the extra borrowing like a very cheap flexible personal loan and to pay it off as quickly as possible – hopefully over the next 12 months. It'll cost me about £130 in interest but to me it's worth it to be able to sleep better at night.

On reflection I think the mistake I made was in not saving up for all the work in the first place. We could have waited another six months or a year before doing up the house but I fell into the trap that many of us do which is 'buy now, pay later'. I'm going to have to pay for that mistake.

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