Is a mortgage top-up or a personal loan best option for home improvement finance?

We are looking to do some work on our house (approx. €30k) and trying to figure out the best way to finance it. We have equity in our home: our mortgage has €380,000 outstanding with 30 years left on a house valued at €650,000.

This is our forever home so we won’t ever be selling it. Are we best to add into our mortgage or try and make a personal loan work over a shorter time period?

Ms S.M., email

You may have heard me say many times that a mortgage loan is the cheapest money you’ll ever get – and that’s true. But whether it is always the best option for top up loans can be down both to your discipline and the nature of your existing mortgage.

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You’re planning to invest a reasonable sum in your home 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 day to day living – or energy efficiency, that sounds like a good investment.

You should be able to get a mortgage rate of around 2.2 per cent or less from your current mortgage provider, regardless of whom they are

Figuring out how best 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 to undermine your credit record.

Getting a top-up loan on the mortgage should certainly be possible. Adding €30,000 to your current mortgage would bring the loan to value back above the 60 per cent ratio below which the best offers are available, but not by much, just fractionally above 63 per cent.

Cost of credit

You should be able to get a mortgage rate of around 2.2 per cent or less from your current mortgage provider, regardless of whom they are. If you cannot, you should probably be looking at switching mortgage loan providers anyway – regardless of the financing of the home improvement project.

According to bonkers.ie, you should be able to secure a rate as low as 1.9 per cent with Bank of Ireland's four-year green rate.

Anyway, at 2.2 per cent, you would be paying €1,552 and change a month on your topped up mortgage of €410,000 over the 30 years. That’s an increase from the €1,438 that you would pay at the same interest rate for your current €380,000 home loan.

So that is a very manageable monthly increase of €132.58. However, as you are repaying the €30,000 over the 30-year term of the mortgage alongside your existing mortgage exposure, the cost of the loan in interest payment terms – known as the cost of credit – would be just under €10,888.

If you were to go the personal loan route, the cost of credit will depend on the period over which you want to pay back the loan.

Personal loans

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

If you cannot afford the €563.30 monthly payment, you could take the loan for a 10-year period with Avant. The monthly repayment would drop to €329.25 but as the interest rate is higher, at 5.9 per cent, and the repayment term longer, the cost of credit to you on the loan would be €9,510, which is not far short of the 30-year mortgage option.

You could cut the cost of credit to around €2,268 by opting for a three-year loan – again that An Post Money option – but it would involve monthly repayments of €896.35.

If you are on a fixed rate, there will be rules about what extra payments you can and cannot make

Of course, the cheapest option would be to tag the borrowings on to the mortgage but accelerate the repayments. That way you are getting the benefit of the 2.2 per cent mortgage interest rate but not dragging the repayment out over the next 30 years.

If you were to decide to repay it within five years – by paying an additional €527 a month on your current mortgage repayments – the cost of credit would fall to a modest €1,630 or so.

If you are on a fixed rate, there will be rules about what extra payments you can and cannot make. Some mortgage products allow some accelerated repayments – generally the odd lump sum payment up to a certain maximum percentage of the outstanding balance; others do not.

If your loan is a fixed interest one with no facility for enhanced repayments, you can simply lodge the amount you’d like to repay, monthly or otherwise, into a separate account and transfer it to the mortgage account at the end of your current fixed period and before you lock in to any other fixed rate. The cost of the credit would be slightly higher than the €1,630 but still well below the personal loan options.

It’s all down to how disciplined you’re prepared to be really.

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