Revamp your home without remortgaging

Interest rates may be set to rise, but the price of one form of borrowing is plummeting. Thanks to a price war between the banks, the cost of personal loans has been falling in recent months. Some of the cheapest rates are available on loans of £5,000 and £7,500. If you were looking for a £7,500 loan in January, you could have expected to pay an APR or true rate of 10.16 per cent: this has almost halved to an average rate of 5.53 per cent — a difference in interest of £925 over the term of the deal. Rates of 4 per cent or less are now coming onto the market.

Among those taking advantage of the personal loan summer sale are homeowners who want to fund improvements, such as loft conversions and new kitchens. Not so long ago they would have opted to remortgage but following the introduction of the draconian Mortgage Market Review affordability tests, they are turning instead to personal loans, which are far simpler and speedier to arrange. Personal loans are not covered by the MMR, which has ushered in intrusive questioning about a loan applicant’s ability to meet the repayments. You can get a personal loan within a week. It would probably take longer for a mortgage lender to organise a meeting at which you would be interrogated about your weekly supermarket shop and other items of personal expenditure, including visits to the hairdresser, cinema and so forth.

Research by Hitachi Personal Finance, a loans company, shows that nearly a quarter of borrowers take out loans to pay for some form of home improvement. The peer-to-peer lender Zopa adds that the number of customers it has for these types of loans has jumped during the 12 months to July this year, up from 4,869 to 7,851.

“We’ve seen a marked increase in the take-up of high-value unsecured loans in the last three months — up nearly 30 per cent,” says Gerald Grimes, managing director of Hitachi Personal Finance. “Borrowers are becoming more aware that an unsecured loan provides a quick and cost-effective way to invest in their property without the need to renegotiate their existing mortgage deal.”

Earlier this month, HSBC went under the 4 per cent barrier by offering between £7,000 and £15,000, with repayments spread over one to five years, for just 3.9 per cent. Although this deal is only available to existing customers, Sainsbury’s will match the rate if you take out a loan of between £7,500 and £15,000 and repay it within three years. Meanwhile, taking out a £7,500 loan over three years through Hitachi Personal Loans will cost just 4.1 per cent — a rate that Tesco will match.

For smaller amounts, borrowers have the option of credit cards, and MoneySuperMarket says that consumers “have never had it so good”. Last July, the average length of term of the best five zero-per-cent cards was 26 months — this has now increased to 32 months. Barclaycard, for example, offers 0 per cent balance transfers for 33 and 32 months, with fees of 2.99 per cent and 2.89 per cent respectively. Bank of Scotland and Lloyds this week launched a 28-month card that only charges a 1.5 per cent fee on balances transferred within the first 90 days.

One of the reasons for this glut of ever-cheaper credit, according to Jafar Hassan of uSwitch.com, is that the Bank of England’s interest rates have stayed “so low for so long” that lenders are trying to attract as many customers as they can in anticipation of rates going up again. Mr Hassan says now is the time to make the most of the cheap deals on offer. “Lenders will probably raise average rates once the Bank of England rates go up.”

Lenders are obliged to offer the headline rates on personal loans as well as cards to 51 per cent of successful applicants, but Andrew Hagger, of moneycomms.co.uk, warns that you should not assume you will always get the best deal. “Only 51 per cent of successful applicants have to be offered the headline APR so if your credit record is less than perfect, don’t be surprised if you are offered credit at a higher interest rate.”

Loan vs mortgage

Opt for a personal loan and you could save thousands, as Andrew Hagger, of moneycomms.co.uk, says.

“If you added £25,000 to your mortgage over 20 years, assuming a rate of 3.5 per cent on a 75 per cent loan-to-value mortgage, you would pay an extra £145 per month. That’s interest of £9,800.

“However, a £25,000 personal loan taken out over seven years with Clydesdale/Yorkshire Bank at 5.7 per cent would see you repay £359.92 per month or interest costs of £5,233. The personal loan choice would save you £4,567 in interest charges.”