Other than saving up your own money to finance an extension, the best way to finance an extension is to remortgage or take out a further advance with your current lender. These 2 options will be the most cost effective.
Funding an extension
If you have decided to extend and improve your property then next you will be looking at how to finance an extension. There are many options that you should consider. In this article we will look at the cheapest options, the quickest options and some options we are sure you would not have thought of.
We will answer your questions including; Can a remortgage include renovation costs? Can you borrow against your home to buy another house and we look at financing options for a house that needs work doing to it.
In the UK we have two great obsessions, Tea and DIY. With the increasing value of property many of us are deciding to stay where we are and to extend and renovate the homes we are in. These works include refurbishment of a property, perhaps a new bathroom or kitchen through to multi-storey extensions creating more space downstairs and additional bedrooms upstairs.
Whether you intend to do the work to the property yourself or employ a builder is up to you, either way you are going to need the funds to enable you to extend or renovate your property. There are 5 ways you can do this, and they are:
- Further advance from current mortgage lender
- Second charge loan
- Bank loans and credit cards
We look at the pros and cons of each of these options and provide you with the knowledge and tools to enable you to finance your home renovation project.
Remortgage to finance a property extension
At the start of 2018 interest rates are still near all-time lows and so borrowing money is cheap. A first charge secured on your house with one of the mainstream lenders will be the most cost-effective ways to finance an extension on your property.
Use our mortgage repayment calculator at the side of this page to work out what your monthly repayment costs might be.
Can you remortgage to do works to a property?
Most UK mortgage lenders will grant you a mortgage to fund works to a property. However, the amount of work you intend to do to a property will affect whether they will lend.
If you intend to knock down your house and start again then unfortunately lenders are going to decline your application. Mortgage lenders need to know that their security is sound so that in the event of repossession they are not left with a piece of land and no house on it and therefore no way to get their money back in the event of reposession. In this scenario you need a self-build mortgage and the funds will be released in stages as the build progresses.
If you intend to carry out structural work that will require planning permission or falls under permitted development but will need building reg’s then the lender may ask you for a schedule of works and ask who will be completing the works.
Using the right mortgage lender and presenting the application in the right way is essential to ensuring you get approval for your remortgage to fund works to a property.
Further Advance from your current lender to finance a property extension
What is a further advance mortgage?
A further advance mortgage is where the current mortgage lender with a charge against your property lends you further funds. The funds can be used for several reasons including funding an extension, to repay debt or for personal use. The lending can not be for speculative reasons, such as investing in cryptocurrencies.
A further advance will be cost effective as most lenders will offer further advances at rates similar to their main mortgages, this is because they hold a first charge over your property and all lending will be repaid to them when you sell your property.
The mortgage lender may need to send out a surveyor to value your property or they may use a ‘drive-by’ valuation. Some lenders also use their own internal house price index valuation. Further advances are available up to 90% loan to value although some lenders are more conservative.
When can I take out a further advance?
Most lenders will insist on you paying your mortgage for at least 6 months before they will consider lending you the extra money.
Can I take out a further advance to pay back money I spent doing works to my house?
If you have already completed the works and used your own funds or credit cards/loans, then a lender will lend you the funds to repay the debt.
Second charge loan for extension to house.
What is a second charge loan?
A second charge loan is a loan from a lender that will take second place in order of repayment behind a first charge lender. Second charge loans are more expensive than first charge loans.
Why would I need a second charge loan?
Sometimes first charge lenders do not issue further advances. Past lenders that don’t lend anymore include Bank of Scotland, Mortgage Express and Capital Home Loans, amongst others. These lenders may not allow you to borrow any more money.
Another scenario would be where you have a very low rate of interest on your main mortgage and don’t wish to disturb it.
In both instances a second charge loan is a great way to borrow more money on your property to do the works to it.
As the second charge lender will be repaid after the first charge lender it carries more risk and consequently the rate of interest will be higher. There is a large market for second charge loans and your options will come from a whole host of lenders and therefore this option is still a cost-effective way to borrow money when compared to high interest credit cards and personal loans.
Bank Loans and Credit Cards
If you are unable to remortgage, take a further advance or second charge then a personal unsecured loan or a credit card may be an option to finance an extension to a property.
The reasons you may not be able to take out a mortgage or second charge loan include there not being enough equity in your property, adverse credit or an insufficient income.
A credit card or personal loan will often have a higher rate of interest as the loan is not secured on your property and therefore carries more risk of being repaid.
Saving up enough money to finance works to your home
By far the cheapest way to finance works to your property is to be a good saver of money. Unfortunately, we don’t all have the luxury of being able to save enough money quickly enough. Often the works we need to do to a property are due to an urgent repair or because you need more space, perhaps in the event of a growing family. In these situations, saving up to pay for works to a property may not be an option.
Using an independent UK Mortgage broker
If you need a loan for an extension to a house or are thinking of funding an extension then working with an independent UK mortgage broker will allow you to price up a remortgage, further advance or second charge.
Using social media and through our regular newsletter we answer your common questions:
Can a remortgage include renovation costs?
Yes, a remortgage with a UK mortgage lender can include renovation costs. The nature of the works may affect the lending decision.
Can you borrow against your house to buy another house?
Yes. Many of our clients remortgage their own properties to buy an investment property or second residence. Often these properties need works doing to them and can then be sold or refinanced to move on to another property.
Is there such a thing as a ‘Buying a house that needs work mortgage’?
Buying a house that needs work mortgage is more commonly known as a refurbishment mortgage. When considering lending, a lender will assess if the property is habitable on the day of completion. If not then the type of mortgage you can get will depend on the work needed to make the property habitable.
The types of mortgages range from light refurbishment, heavy refurbishment and property development finance for new build houses.
If you intend to complete works to a property and need funding, then Fox Davidson are a leading independent UK mortgage broker with access to first and second charge lenders in the UK. Do call or email to find out more. We can work by phone and email or why not drop in to one of our offices in Bristol, Bath or London.