If you want to add value to your home, a house extension and refurb can be a good place to start. Research from Hiscox suggests that a new kitchen or bathroom will typically add ~5% to the overall value of your property. There are various options to fund your house extension, each of which has its own advantages and disadvantages.
Finding the one that works best for you will depend on your circumstances, so let’s go over some of the best options that exist for funding the project.
Can your mortgage be increased to fund an extension?
Yes, in many cases it will be possible to increase the amount you are borrowing to finance an extension. This will involve taking more funds from your existing mortgage lender that are put towards the building of the extension, with the repayments spread over a long term. There are, however, various other options that may be better for you, so keep reading to find out about the different options to consider.
Remortgaging your home
A remortgage is the process of transferring your mortgage from one provider to another. Most people do it to raise funds for something by committing to a longer repayment term when making the switch. This option is particularly useful for raising funds quite quickly.
You should remember that your mortgage is a very large loan that is secured against your home. If you increase the amount you are borrowing, there are risks – if you are unable to keep up with the repayments then your home could be repossessed by the provider. If you are considering remortgaging for home improvements, you must ensure you are fully aware of all the details regarding cost before taking the leap.
Using a credit card
There is a simple appeal in putting a relatively small- or medium-sized house extension on a credit card. If this is the route you choose, make sure you’re on a deal that has a 0% introductory rate if you’re acquiring a new credit card for this specific purpose. Otherwise, you could end up paying a lot of interest on the investment.
One benefit of choosing the credit card option is that there are some protections from Section 75 of the Consumer Credit Act. If problems arise during the project, such as a contractor failing to deliver on their service, this could be a real lifeline.
As with a remortgage, you need to think carefully about whether the repayment plan is something you can afford. Also, look carefully for any hidden fees/charges when spending in this way. With credit cards, it is not unusual to see purchase and cash advance interest rates that are staggeringly high.
Using your savings
If you have a pool of savings to draw from then the obvious benefit is that you won’t need to borrow extra money to fund your extension. However, in the current climate, interest rates are not very competitive for savers and you may want to assess whether outlaying such a large amount of cash all at once is something you are comfortable with.
Think carefully about how long it would take to save that money up again and weigh the pros and cons against the interest you would pay if you went down the borrowing route. We all have our own unique circumstances so there is no one-size-fits-all answer. Be mindful of the fact that many of the better savings account deals may have restrictions on your ability to access large amounts of your money.
Taking out an unsecured loan
If borrowing more against your property is not an attractive prospect, you may be able to apply for an unsecured loan, perhaps from your bank. Secured loans use collateral like a house or car as protection for the lender, while an unsecured loan is judged primarily by the borrower’s history of managing credit. A home improvement loan is a type of unsecured loan – if you have a good credit record, this type of loan could be ideal for you.
You may find a good deal with a fixed interest rate and a repayment term of up to ~5 years. The interest rate offered to you will depend on your credit score – that 3-digit figure that lenders use to determine your risk level with regards to borrowing. The interest rate will also depend on the amount borrowed and the term of the loan.
Exploring options for a second charge mortgage
A second charge mortgage is also known as a secured charge loan and it involves keeping your current deal as it is whilst finding another mortgage lender who will grant you an additional deal. With this arrangement, repayments would have to be paid on both mortgages simultaneously. This is an option that should be thought through very carefully as you’ll be increasing your debt that is secured against your home. It could also be at a rate that’s higher than your current mortgage.
One benefit of a second mortgage is that the interest rates may well be lower than those on credit cards or unsecured loans. This is because your property backs the loan, reducing the risk on the part of the provider.
Getting expert help
If you have plans to complete works on your property and you need funding, Think Plutus is a leading whole-of-market mortgage broker in the UK. We have access to mortgage lenders across the entire UK market along with a wealth of experience and expertise in finding the right funding for our clients. Please don’t hesitate to get in touch by phone or email to find out more. We can work with you remotely or you can arrange an appointment at one of our offices and we’ll be happy to help you find your ideal choice for funding a house extension.