Is a mortgage recharge or a personal loan the best option to finance home improvements?

We are thinking of doing some work on our house (approx. €30,000) and trying to find the best way to finance it. We have equity in our house: our mortgage is €380,000 outstanding with 30 years remaining on a house valued at €650,000.

This is our forever home so we will never sell it. Is it better to add to our mortgage or try to make a personal loan work in a shorter period of time?

Ms. SM, email

You may have heard me say many times that a home loan is the cheapest money you’ll ever get, and that’s true. But whether it’s always the best option for side loans may depend as much on your discipline as it does on the nature of your existing mortgage.

You are planning to invest a reasonable sum in your house, but on the basis that you see it as your “forever home” and that this investment will presumably allow you to make adjustments that make it even more suitable for your daily life. – or energy efficiency, that sounds like a good investment.

You should be able to get a mortgage rate of around 2.2 percent or less from your current mortgage provider, regardless of who they are.

Figuring out the best way to finance such work is a sensible first step. I’m assuming all options are open, given the equity you have in the property and no information from you that there is anything undermining your credit history.

Surely it should be possible to get an additional loan on top of the mortgage. Adding €30,000 to your current mortgage would bring the loan value back above the 60% below which the best deals are available, but not much, just a fraction above 63%.

cost of credit

You should be able to get a mortgage rate of around 2.2 percent or less from your current mortgage provider, regardless of who they are. If you can’t, you should probably consider switching home loan providers anyway, regardless of financing the home improvement project.

According to bonkers.ie, you should be able to get as low as 1.9 percent with the Bank of Ireland’s four-year green rate.

In any case, at 2.2% you would be paying €1,552 and change per month on your recharged mortgage of €410,000 over 30 years. That’s an increase from the €1,438 you’d pay at the same interest rate on your current €380,000 home loan.

So that’s a very manageable monthly increase of €132.58. However, since you are paying the €30,000 over the 30-year term of the mortgage along with your existing mortgage exposure, the cost of the loan in terms of interest payments, known as the cost of credit, would be just under €10. €888.

If you had to opt for the personal loan, the cost of the credit will depend on the period during which you want to pay the loan.

Personal loans

If you were to consider a five-year term, a loan repayment calculator provided by the Competition and Consumer Protection Commission (CCPC) says your best option would be the Green Home Improvement Loan from An Post Money. With an interest rate of 4.9 percent, you would be paying the loan at €563.30 per month and the cost of the credit over the five years would be €3,798, about a third of the mortgage option described above.

If you cannot afford the monthly fee of €563.30, you can take out a 10-year loan with Avant. The monthly payment would be reduced to €329.25, but because the interest rate is higher, at 5.9 percent, and the payment term longer, the cost of credit to you on the loan would be €9,510, That’s not too far off from the 30-year mortgage option.

You could reduce the cost of credit to around €2,268 by opting for a three-year loan (again the An Post Money option), but it would imply monthly payments of €896.35.

If you have a fixed rate, there will be rules about what additional payments you can and cannot make

Of course, the cheapest option would be to add the loans to the mortgage but speed up the payments. That way, you’ll get the benefit of the 2.2 percent mortgage interest rate, but you won’t be late for the next 30 years.

If you decide to return it within five years, paying an additional €527 per month in your current mortgage payments, the cost of the credit would be reduced to a modest €1,630 more or less.

If you have a fixed rate, there will be rules about what additional payments you can and cannot make. Some mortgage products allow some accelerated payments, usually an odd lump sum payment up to a certain maximum percentage of the outstanding balance; Others don’t.

If your loan is a fixed rate loan with no enhanced payment option, you can simply deposit the amount you want to pay, monthly or otherwise, into a separate account and transfer it to the mortgage account at the end of your current fixed loan. period and before fixing any other fixed rate. The cost of the credit would be slightly higher than €1,630 but still well below personal loan options.

It all depends on how disciplined you are prepared to really be.

Please send inquiries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email at dominic.coyle@irishtimes.com. This column is a reading service and is not intended to replace professional advice.

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