Extending your home can be a smart move to increase the value of your property, but how would you fund this expansion? Did you know you can remortgage for an extension? By working with When The Bank Says No’s expert team of remortgaging advisors you can find the perfect deal for you to suit your new extension.
Read on for more information. Below we’ll tell you all you need to know before taking this step. It lists the factors to consider as well as other alternatives to help you feel secure in your decision.
What Factors To Consider Before Remortgaging For An Extension?
The costs of building an extension can be really high, which calls for a fast solution. Using a remortgage to get an extension can be a clever move in this case because the interest rates of mortgages can be lower than credit cards.
When you remortgage for an extension you add the cost of that extension to the remainder of your current mortgage. Then, you apply for a remortgage of that sum.
However, there are several factors to consider before deciding to remortgage for a house extension, such as:
The Size of Your Equity
Perhaps, the first thing you need to consider is the size of your equity. Equity means the value of your ownership in the house in total after the remortgage. In simpler terms, it’s the sum you’ve already paid in the first mortgage.
Simply, calculate the value of your equity by subtracting the value of the mortgage from the total price of your property after the expansion.
Ideally, you should aim for a low loan-to-value (LTV) ratio. The lower that ratio is, the more you get out of your remortgage. In fact, a high LTV can have a direct impact on the amount you can get to fund your project, the monthly payments, and the interest rate.
For example, if your property is worth £200,000 and:
- The mortgage balance = £50,000, then you have £150,000 equity in the home, which translates to a loan-to-value ratio of £50,000 divided by £200,000 x 100 = 25%.
If the reverse were true, then:
- The mortgage balance = £150,000, and you have £50,000 equity in the home, which would translate to a loan-to-value ratio of £150,000 divided by £200,000 x 100 = 75%.
The more equity you have, the better deals you’ll get when remortgaging because you’re seen as less of a risk to the lender, whether that be with your existing mortgage lender or new lender. They know they’ll likely be able to recover the money should you be unable to pay because of the amount you’ve already paid off from your original mortgage.
The Value of Your Extension
You also need to ask yourself how much this extension will add to the overall value of your property.
By remortgaging, you increase your debt, which means additional monthly repayments. Therefore, you should be extra cautious and ensure that you don’t lose money in the long run.
>Again, you should calculate the profit by comparing the additional loan to the value this extension will add to your home.
That said, go for the remortgage anyway if you’re not in it for the profit. Those who build the extension for the extra space can take the loan without calculations, as they don’t plan on selling it soon and are doing it to improve their quality of life in their home.
Your Financial Ability
Before you take such an important step, make sure that you’ll be able to make the loan repayments. After all, remortgaging means either increasing your monthly payables or adding a longer mortgage term.
Thus, lenders will calculate your ability to afford the payment of such added loans. You should too. It’s simple; you need to determine whether you can afford to pay the money if anything changes in your life.
Your financial ability can be a major deal breaker. You should compare your income to your expenditure. That way, you get to think like lenders and understand better whether you’ll be able to pay back the loan with no trouble.
How to Remortgage for an Extension?
Remortgaging for an extension doesn’t usually require a great deal of work. It only needs you to be aware of all the details to make an informed decision.
To remortgage for your extension, follow these steps:
1. Determine the Type of Extension
Extensions mean increasing your living space by either adding new buildings or converting unused areas into living spaces. There are several types of extensions you can add to your home, including:
- Loft Conversion: This entails converting an attic space into a room. It comes in several forms that all require the attic to have a head height of at least 2.2 metres.
- Dormer: This is an extension to a sloping roof that allows you to convert a garage or a bungalow, giving more height space to a room with a sloping ceiling.
- Double-Storey: This extension process is complicated. It allows you to build a living space and add another storey to it.
- Wrap Around: That’s a comprehensive extension that adds depth and width to your home. It enables you to build in the garden and add living space to a detached or semi-detached home.
- Rear: A rear extension involves removing the rear walls of your living space and adding new foundations to extend the living space from the rear side of the house.
- Basement: Build a new basement or convert an existing basement into a room.
2. Calculate the Value of your Equity and Your LTV Ratio
Once you know which type of extension you’ll implement in your home, you can start calculating its value against its costs. That way, you ensure getting the most out of your extension plan.
The value of your equity and LTV rates depend primarily on the value the extension will add to your property. Thus, it varies according to the type and size of the extension.
For instance, a rear extension or a double-storey that adds vital living spaces can increase the value of your home drastically. In addition, converting or building a basement can boost the value of your property by as much as 20% in some areas according to some reports.
3. Find Out If You Need Planning Permission
Most home improvement and extension plans don’t require planning permission. However, it’s best that you remain on the safe side by checking out the local regulations.
Generally, you’ll need planning permission for your extension if:
- You live in a conservation area, national park, or near a world heritage site.
- Your extension takes up half the land around the house or more.
- The extension is more than half the original width of the house.
- Your extension exceeds the limits set on height and width. For instance, the limit is three metres for double-storey extensions.
4. Consult a Mortgage Broker
You might raise your eyebrows at mortgage brokers suggesting using their services as a key step to remortgaging for an extension, but it’s true. By working with mortgage brokers, like our experts at When The Bank Says No, you’ll get access to the best possible deals, even if you have a history of bad credit.
Not only can we find you the best deals, but we can also help with the application process and treat you as an individual with individual needs, rather than another number as most banks do. Whatever help you need to find the best remortgage deal, we’ll be there to advise.
Do You Remortgage Before or After Implementing the Extension?
While it makes sense to apply for the remortgage before the extension, some people opt for applying after the work is done. This decision depends on your ability to finance the project upfront and get the money later.
However, it might be risky. In an ideal world, the extension will increase the value of your home, which translates into cheaper rates and better terms. What if that doesn’t happen, though?
What if the extension doesn’t add much to the property’s value? That might put you in trouble. It may lead to higher interest rates or even rejection from lenders.
Therefore, we recommend that you consult a mortgage broker before taking the decision. Mortgage brokers know more about property value and can read the market to anticipate the value increase. Such calculations can help you make a more informed decision.
Tips to Benefit from Remortgaging for a House Extension
Here are a few tips to help you get the most out of your remortgage deal:
- Ensure that your home’s value has increased since the initial mortgage. That can give you a lower LTV, which makes you eligible for better interest rates and loan terms.
- Don’t remortgage before the current mortgage is at least close to its end. Otherwise, you might have to pay a sizeable early repayment charge.
- Look at whether a remortgage deal with your current mortgage lender is going to be better, or whether you will be better served by going to a new lender.
- You can get cheaper mortgage rates if your extension makes the home more energy-efficient. For instance, you can potentially add home improvements such as solar panels on the newly built roof.
What Are the Alternatives to Remortgaging for Home Extension?
Fortunately, there are several alternatives to remortgaging for an extension, especially if you are struggling to get mortgage approval for any reason.
Consider all your options before you take the plunge. Here are a few alternative solutions:
Use Your Savings
Paying with your savings can be the most straightforward way to finance your home extension. It’ll spare you the hassle of taking a loan and making monthly payments.
This payment method gets the most value out of your extension. When the value of your property increases, you’ll effectively get your money back and more when you sell the property, without having to pay any monthly interest.
Pay by Credit Card
Paying with a credit card can be a safe alternative to remortgaging. For instance, it protects you if you pay a contractor who doesn’t deliver.
However, beware of the level of interest payable. It can be a good idea to apply for a new credit card with low-interest rates for this purpose.
Get a Second Mortgage
A second mortgage is also called a further advance or a secured charge loan. It’s exactly as it sounds. It involves taking another mortgage separate from the first one.
You can get the second mortgage from a different lender. It’s likely that the interest rate will be higher than the first mortgage, but it’ll still be lower than those of credit cards, personal loans or home improvement loans.
Take Out an Unsecured Loan
Lenders offer unsecured home improvement loans that can be fit for building an extension to your home. They allow you to borrow money without offering up your property as security.
The catch here is that these types of unsecured loans usually have higher interests and depend on your credit score rather than your equity. Thus, you can only opt for this alternative if you know you have good credit.
An alternative might be to take out a home improvement loan on a secured loan basis, with your home being the asset it is secured against. Secured loans can take longer to process and you need to ensure that you can afford to make the monthly repayments.
Apply for a Bridging Loan
A bridging loan is an ideal alternative if you can’t remortgage for the time being. If you need to spend more time working in your current job or to erase bad credit history, go for this type of loan.
These loans usually have more flexible terms and faster processing times. However, they typically feature high-interest rates.
Get an Equity-Release Mortgage Deal
This type of mortgage allows people above 55 to borrow a sum of money equal to the value of their property. In other words, you tie your equity to a secure loan.
A popular example of such loans is the lifetime mortgage. It allows you to re-acquire your property after paying off the debt. In the case of death, the debt is repaid through the sale of the property.
Remortgaging for an Extension FAQs
Can I remortgage for an extension if I have a bad credit score?
The good news is that even borrowers with bad credit scores can get mortgages and remortgages – you just have to know where to look. Work with When The Bank Says No to find the best remortgaging deals, even with bad credit.
Can I remortgage to get an extension even if I’m self-employed?
Yes, you can! In the past, it was a challenge for self-employed people to get a mortgage or remortgage. However, nowadays many mortgage lenders would approve you with only a year account and with the right professional mortgage brokers on your side.
Remortgaging For An Extension Summary
Remortgaging for an extension can be a smart financial decision. However, you need to consider several factors, such as LTV, your current financial state, and how much value the extension will add to your property.
Always talk to a mortgage broker before you take your decision to remortgage for an extension. Contact our experts today.