Against a background of an uncertain housing market, many people will consider improving their home rather than moving. That option is likely to gain even faster ground as homeowners weigh up the cost of moving – putting the current home on the market, the lottery of buying a new house, legal and professional charges, and the hiring of a removal company, to name but a few.

That’s not to say that there are no costs in building an extension, of course. One of your initial decisions is whether there is an economic case to be made for building an extension – so, whether the cost of building is less than the eventual increase in the market value of your home. As an article in Homebuilding & Renovating on the 12th of May 2020 suggests, this may be a difficult case to make, and you might need to look at other properties in your area with similar extensions to see how they are currently valued.

Let’s examine some of your options for financing such a project – and discover why one of the most cost-effective decisions might be to remortgage to build an extension:

Savings

  • it depends how much you are looking to spend, of course, but you might be in the fortunate position of having enough to cover the costs of building an extension from your existing savings;
  • as the online listings site Right Move suggests, you might want to compare the interest rate earned by your savings and the currently low cost of borrowing – you might decide that it is worth taking on a loan, rather than eating into your hard-earned savings;

Unsecured loan

  • an unsecured, personal loan from your bank or building society might be worth considering if the building project is going to be relatively inexpensive;
  • in the absence of any security on the loan, the interest rate is likely to be somewhat higher on your borrowing – typically over a relatively short period of up to five or six years – but at least your home is not at risk in the event of your defaulting on the repayments;

Use your plastic

  • you are probably using it for a host of other purchases, so why not just use your credit card to pay for the materials and labour needed to build an extension;
  • it is only at all feasible if the costs are within your credit card spending limits, of course – and remember that once you’ve maxed out the card on the building project costs, there will be no room for any further expenses;
  • if you really are intent on pursuing this option, at least try to make sure that the card you are using is still under a zero-rated introductory offer – and repay the balance before that offer expires, and the interest charges pile up, or this option could prove the most expensive in terms of your cost of borrowing;

Second mortgage

  • even though your home may be subject to a mortgage, you might still consider applying for a second mortgage on the same property – known as a secured charge loan;
  • your home is offered as security on this second mortgage, so as well as repaying two mortgages, you also run the risk of losing your home if you default on the repayments for either loan;

Remortgage to build an extension

  • generally considered an attractive form of borrowing to build your extension is by way of a remortgage;
  • this allows you to replace your present mortgage with a remortgage, increasing the amount you are borrowing (to cover the cost of building your extension) and, possibly, also extending the repayment period of your loan;
  • although a remortgage is a new mortgage – it replaces the one already in place – any lender will consider your history of managing repayments on the initial mortgage;
  • provided you have maintained the monthly instalments and made your mortgage repayments when they fall due, this will be to your credit, and the lender may offer a more competitive rate of interest accordingly;
  • since the new borrowing is also secured against the value of your home, this too helps to ensure that you obtain the loan at a favourable rate of interest.

Many homeowners would prefer to extend their current home rather than submit themselves to the hassle and expense of moving home. Although you have several options for financing any building project, you may find that the most straightforward and cost-effective is to remortgage to build your extension.

FAQs – Can I remortgage to build an extension?

How do you use a remortgage to fund home improvement work?

Yes, It is possible to remortgage to fund the home improvement work. The process starts from taking the amount left on your current mortgage and adding the cost to your home improvement project and then applying for a remortgage for the total amount. This can be done online using our website, over the phone or through your local branch. You can also contact an independent mortgage broker for advice.

What is the difference between a first and second mortgage?

A first mortgage is usually taken out to purchase a house outright. A second mortgage is used to finance improvements to the property such as extensions, loft conversions etc.

Do I need to tell my mortgage lender about an extension?

Yes, you should inform your mortgage provider if you intend to apply for a second mortgage. They will want to know what the purpose of the extra money is going to be spent on. If you don’t tell them, you may not get approval.

Can I remortgage my house to pay for an extension?

Yes. As long as you meet the requirements set by your lender, you can take out a second mortgage to fund your extension.

Is there anything else I need to think about before applying for a second mortgage?

You must make sure that you can afford to pay back both loans. Your existing mortgage needs to be paid off completely before you can apply for a second mortgage, but once that has been achieved, you can borrow up to 100% of the value of your home.

Will my bank let me remortgage for home improvements?

Most banks allow you to remortgage for home improvement purposes. However, you will need to check with your specific lender.

How much can I borrow for a home improvement?

The maximum amount you can borrow depends on how big your home is. For example, if you are planning to extend your kitchen, you could borrow up to 75% of the value of the land plus 25% of the value of all other parts of the house. This means that you could borrow £75,000 for a four bedroom house.

If you plan to carry out major works like installing a new bathroom or extending your living room, you might be able to borrow 90% of the value of each part of the house. This would mean that you could borrow £90,000 for a four-bed semi-detached house.

If you are borrowing more than this, it is likely that you will need to put down some equity in the form of a deposit.

What do you need to consider before applying for a remortgage to pay for home improvements?

Before you start looking at mortgages, you need to decide which loan you want to take out. There are two main types:

a) A fixed rate mortgage where you agree to repay a certain percentage of the interest charged every month.

b) An adjustable rate mortgage (ARM). With an ARM, the interest rates change depending on the Bank of England base rate.

Once you have decided on the type of mortgage you want, you need to look into whether you qualify for one. You can find out if you qualify by visiting our website www.needingadvice.co.uk

Is it worth the cost of the remortgage?

It really depends on how much work you want to do and how much you can afford to spend. It is also important to remember that any payments made towards the original mortgage will reduce the overall amount available to you when repaying the second mortgage.