New research from Pepper Money shows that home improvements have emerged as the most popular reason for borrowing, with 26% of mortgaged homeowners planning to finance renovations in the next year. However, the data reveals a significant financial risk, as over half (53%) of those borrowers are turning to high-interest credit cards, potentially costing them thousands in unnecessary interest payments.
Home Improvements Lead Borrowing Reasons
In a national survey of over 4,300 homeowners, 26% of respondents cited home improvements as their primary reason for taking on debt in the upcoming 12 months. This marks a shift in borrowing priorities, with debt consolidation following closely at 22%. Homeowners are increasingly embracing an ‘improve, don’t move’ attitude, especially with rising interest rates making moving house a less attractive option.
Credit Cards vs. Homeowner Loans: The Financial Risks
Despite the popularity of home renovations, the research highlights a troubling trend: 53% of homeowners plan to finance these projects using credit cards, which carry an average interest rate of 24.58%. In contrast, only 5% of homeowners are opting for second charge mortgages, a secured loan that offers significantly lower interest rates and more manageable repayment terms.
For example, a homeowner borrowing £16,447 on a credit card at 24.58% would face over £23,391 in interest over nearly 10 years, with a total repayment of £39,838. By comparison, borrowing the same amount through a second charge mortgage at 9.6% would result in just £4,325 in interest over five years, saving over £19,000.
Awareness Gap for Second-Charge Mortgages
Despite these potential savings, two-thirds of homeowners remain unaware of second-charge mortgages, leaving many to default to expensive credit card debt. The data from Table 2 underscores this gap in awareness:
- 53% of homeowners plan to use credit cards
- 30% consider unsecured personal loans
- Only 5% are exploring second-charge mortgages
This lack of awareness around more affordable borrowing options could lead to homeowners accumulating significant interest costs unnecessarily.
Ryan McGrath, Director of Second Charge Mortgages at Pepper Money, comments: “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.”
Case study
Jane, 48, from Hemel Hempstead, who borrowed £75,000 via a homeowner loan at 7% in March 2024 for home renovations, shares her experience. Like many, Jane has benefited from borrowing over a long period of time (17 years), this keeps her monthly repayments low while giving her the financial flexibility of early repayments without penalty, should she wish:
“We bought our house about eight years ago. It had great potential, but it was showing its age. We’d been making improvements bit by bit, but overall, the place still felt rather tired.
“The real push for change came from our growing son, Ben. He and his friends were outgrowing our previous setup, so we wanted to make our home more functional for everyone. Instead of dealing with constant disruptions over a long period, we decided it made sense to tackle everything at once. The second charge mortgage gave us the means to do just that, allowing us to transform our living space in one go.
“The interest rates are often more competitive than that of personal loans or credit cards. Plus, you’re borrowing over a longer term, which can make monthly payments more manageable.”
For more information on secured loans available through Pepper Money, please visit www.pepper.money.