"Credit cards continue to be the default option for thousands of homeowners looking to borrow over the next year, but this isn’t always the most cost-effective option "
- Ryan McGrath, director of second charge mortgages at Pepper Money
UK homeowners are leaving themselves exposed to higher interest charges as they look to fund home improvement projects over the next year, according to new research from Pepper Money.
The study shows that one in ten mortgaged homeowners, representing 817,400 households across the nation, plan to take on debt in the next 12 months. One in four (26%) aspiring borrowers are planning to fund home improvements, making this the most popular reason for borrowing ahead of debt consolidation (22%).
The findings highlight a shift towards an ‘improve, don’t move’ attitude as homeowners explore home improvements as an alternative to moving house while interest rates are high.
However, the research suggests more than half of mortgaged homeowners (53%) are opting for credit cards as their primary financing method, raising concerns that homeowners will be saddled with significantly higher interest payments as a result of consumers’ limited awareness of their options.
More than two in three (67%) mortgaged homeowners have never heard of second charge mortgages.
To illustrate the potential difference, a typical second charge loan of £16,447 over five years at an average rate of 9.6% would incur £4,325 in interest, with monthly repayments of £346 and total repayments adding up to £20,772.
If borrowing the same amount on a credit card at 24.58%, the same monthly repayment of £346 would take the homeowner 9 years and 8 months to pay off the debt, with £23,391 of interest incurred before the balance is cleared in 2034.
With 0% interest purchase credit cards typically offering no more than two years of interest-free protection, this would still leave homeowners facing significant interest costs to reduce their credit card balance to zero.
While homeowner loans are still relatively unknown, recent data suggests a growing trend of consumer savviness. Industry data shows the second charge mortgage sector has seen double-digit growth in new business volumes of 14% in the first seven months of 2024 compared with the same period in 2023.
Ryan McGrath, director of second charge mortgages at Pepper Money, commented: "Home improvements can be a significant and valuable investment, both financially and emotionally. Not only can opting to improve rather than move add value to your home when you come to sell, but it can also make the experience of living there more enjoyable altogether.
“However, it’s vital that people don’t sign up to unnecessary costs when they’re tackling home improvement projects. Our research shows credit cards continue to be the default option for thousands of homeowners looking to borrow over the next year, but this isn’t always the most cost-effective option when you consider interest rates, repayment terms, and length of a loan.
"Homeowner loans are a little-known but often sensible way to fund such projects, and can offer more competitive rates and lower monthly repayments than unsecured borrowing. While a second charge mortgage isn’t right for every circumstance, I would urge anyone contemplating home renovations to look into whether a secured loan could be for them and talk to a broker."
