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October 7, 2020
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Remortgaging for home improvements may add an little extra layer of complexity to your remortgage, but as your mortgage is probably your biggest financial commitment, it's always worth checking the options – especially if you can't get a deal that make sit worth while.
You basically take the amount left on your current mortgage and add the cost of your home improvement project, then apply for a remortgage for the total amount:
£150,000 outstanding mortgage
+ £40,000 cost for extension or other home improvements
= remortgage for £190,000
Thinking about some significant home improvements such as an extension or conversion? Wondering how to pay and whether you can get a bit more from your mortgage to do it?
You're not alone, figures from UK Finance show typically there are around 40,000 remortgages every month and about half of these involve additional lending to the tune of an extra £51,470, on average.
It's safe to say a big majority of circa 20,000 remortgages will be used to fund some sort of home improvements – it's the main reason banks feel comfortable enough to provide additional funds.
As with any remortgage, that depends on your property, your existing mortgage loan, and your current financial situation. Of course, when applying for extra money to fund building work, the bank may also want extra details about the improvements being carried out.
If you have equity in your home, have kept up with repayments and can afford the new repayments, you should be able to remortgage for home improvements, but let's break it down a bit.
You should be ok as long as the valuation of your house hasn't significantly dropped since taking out your original mortgage, and your LTV is at least 90%. Bear in mind, the higher the LTV you end up with, the higher your rates are likely to be.
You'll need to have made all your prior repayments, and your total outstanding loan shouldn't be too close to your affordability ceiling. On a normal remortgage, this wouldn't really be an issue as long as you haven't experienced a fall in income since your original mortgage.
However, because you'll be applying for a bigger loan you may hit the limits of what a lender is willing to lend. Generally speaking, you can borrow around 4x your income, but each lender decision is based on its specific circumstances and you can find banks offering up to 6x time your income.
When you apply for a remortgage you are basically reapplying for a mortgage, so you will be subject to all the same criteria as before: debt-to-income, disposable income, savings, existing unsecured loans and credit score checks.
Remember, if you remortgage for home improvements you'll be increasing your loan amount, so both you and your banks need to be comfortable with your ability to maintain the higher repayments.
Let's look at how the remortgaging situation changes when you factor-in the home improvement work you need.
Technically, none or all.
It's really important to understand that you can only borrow against the current value of your house. So, the actual type of work you have in mind, isn't as important as its cost.
As mentioned, banks are relatively comfortable providing additional lending for extensions and other home improvements, after all, the loan is secured on the property value.
Your existing mortgage is £150,000 and you want £40,000 for your building work. That's a total new loan of £190,000. If your house is worth £250,000, then that represents a fairly safe investment to the bank.
However, if your home is worth £200,000 then that's not as safe and your application may be declined. It doesn't matter if you swear blind on your estate agent's honour that your extension will add £50,000 to the value of the house.
Even before starting your remortgage application, there's a lot to think through.
From an emotional point of view, only you will know that. If you don't plan on moving and desperately need to swap the stairs for a fireman's pole, no-one can stop you.
But from a financial point of view, there's more to think about.
As mentioned, your bank only really cares about the current value of your property. However, once they give you the funds, you'll be responsible for paying them back.
With that in mind, it's pretty easy to spot a potential issue; your building work should add value to the property – or at the very least, not lower the existing value.
If this is the case, it's far easier to recover the equity you've used when you remortgaging for the first time after the work, or when you come to sell the property. In effect, the home improvement can pay for itself.
Any home improvement is only a sound financial investment if the value of your home increases by more than what it ends up costing you to have the work done (plus and financial costs).
Not all home improvement projects are created equally, and it's always a bit of a gamble. Here's a handy chart showing, on average, where you can make and lose money.
Of course, before you spend a penny, get an estate agent with good local knowledge to value your home as it is now, and what they think it will be worth after the work.
For most people, you may not have the option, home improvements such as extensions can costs anywhere between £20,000 and £200,000, and unless you have that sort of cash lying around, you'll need to remortgage first.
If you can pay upfront, you could think about doing so then remortgaging afterwards. This way the bank may value your house higher, meaning your LTV will be lower, and you'll have access to better, deals and lower mortgage rates.
Again this represents a bit of a gamble, though. If rates rise, house prices fall, or the work doesn’t result in the expected increase in value, you may not make any savings on your remortgage.
First, just work out a rough cost for your home improvement.
For example, if you want an extension, Homebuilding & Rennovating state you should expect to pay around £1,680 to £1,920/m² for a good quality single extension. Although you can pay up to £2,500/m² or more if you want a top-quality finish over multiple storeys. While the HomeOwners' Alliance suggests the cost of a garage conversion averages £6,000.
Once you have that rough figure and you feel like you can afford it, it's time to get some quotes. You'll want at least 3 to give you some ideas about a good price and some options.
Also, make sure you understand the difference between a quote and an estimate:
As well as the cost of material and labour, you may also need to budget for:
The first thing you'll need to ask yourself is 'will I be hit with early repayment charges?' They're the most painful of all remortgaging fees and can end up costing more than the home improvement work itself.
Early repayment charges are usually applicable until you're in the final few weeks of your initial term. However, they do decrease over the duration of that term. If you're already on your lender's SVR, you should avoid the early repayment charges altogether and only have to pay a small exit fee.
That doesn't mean you'll avoid fees altogether. Lenders could still charge you valuation and arrangement fees. Feel free to use our Mortgage Matcher to see right now exactly what remortgage rates you can get and what fees you can avoid.
If your fees aren't too prohibitive, then you may want to start weighing up the interest rates. Mortgage interest rates will be lower than a personal loan, but the chances are you will be paying the interest back for a significantly longer period of time, which means you could be paying back much more in total.
In order to work out what's best for your circumstances, you'll need to compare the rates, the amount of money you want to borrow (the more you borrow on a loan, the higher the rate), and how long you want to spend paying it back for.
Your Mojo mortgage advisers will be able to talk you through all the remortgage options available to you.
There are other considerations too. Do you want an unsecured personal loan – less risky, but more expensive – or a secured loan, which is cheaper, but your house will be used as security.
A second charge mortgage, also known as a further advance, is another option you may want to look at.
It's basically a second secured loan on your property, but there is a key difference.
A standard mortgage is secured on the property you are going to buy and is based on your deposit, credit rating, income, debt and affordability, the terms and eligibility of a second mortgage is based on the equity you have built up in that property.
However, even if you have enough equity to secure a secure charge mortgage, you will still need to prove your ability to repay the new mortgage.
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