Homeowners choosing to improve, not move

High house prices and the cost of stamp duty are encouraging UK homeowners to invest in home improvements rather than move house. More than half of homeowners would rather renovate and stay put, according to a UK comparison website.

They’re digging down, to make basement playrooms, or kitchens that open straight out onto the garden. Or they’re building up: converting loft spaces into additional bedrooms or office space, or adding a roof terrace.

If you love where you live, but you’ve outgrown your home, or you’re ready for change and have been thinking of moving – but haven’t found anywhere affordable, then you may be considering some extensive home improvements.

It’s good to be clear from the outset: are these substantially decorative improvements to update your home and make it more to your taste? Or are these targeted improvements intended to add value to your property?

How will you fund the improvements?

Small-scale redecorating or light refurbishment may be funded by a personal bank loan, or on a 0% credit card – if you believe you can repay it completely within the free-loan term.

The cost of more substantial work requiring planning permission, such as digging down for basement space, or building up into the roof area, will require more structured funding.

Your current mortgage lender will need to approve the work. That requirement, and a reassessment of your affordability criteria, can cut off the most obvious avenues for funding. An experienced mortgage broker (such as Clifton Private Finance) will be able to find the most affordable alternative forms of short-term finance for you.

Approaching your current mortgage lender

This will be most people’s first port of call: after all, it’s the same lender, the same house, and you’re going to be adding to the value – they should be delighted, yes?

Sadly not. Many homeowners are surprised to find that their current high-street lender is not happy fund these kind of extension works – and in fact they may refuse permission for you to go ahead with funds from another lender.

Their concerns may be:

• Damage to the structure of the building from basement or roof-support works
• Loss of value in the property while building works are going on

What are your options with a current lender?

If you want to extend your current mortgage you're looking at cap raising.

If your current mortgage has come to the end of its fixed term, you could be looking at a product transfer with further advance. May be small admin fees

• Your lender will carry out a new affordability assessment to assure themselves you can support this bigger borrowing.
• They will also need to give their approval for the works.

Costs: there will some admin fees and possibly a new valuation fee. The question is whether they'll agree. 

A second-charge bridging loan

If your current mortgage company isn’t willing to lend you the additional funds, or their rates are punitively high, a broker will look for alternative short-term finance for you from other lenders.

This will be a second charge bridging loan, so-called because it takes second place for repayment behind your existing mortgage agreement, should for any reason your property lenders need to sell your home to reclaim their money.

Because it’s second in line for repayment, which presents a higher risk for the lender, this loan will be offered at a higher interest rate than your original mortgage. But you need to be assured that you’re getting the best rate available.

• This is a regulated loan because it’s a loan against your own home it. For your own protection it cannot extend longer than 12 months.
• Because it’s assumed you already have a substantial mortgage commitment, you don’t pay the interest each month on this extra borrowing – it’s “rolled up” into the total value of the loan, to be paid at the end.
• So the amount you will have available for your renovation project will be the loan amount minus the interest: you need to be sure you borrow enough to cover the interest as well as your project costs.
• And the total of your mortgage borrowing, and the bridging loan, can never exceed 70 percent of the current value of the property (sadly, not the estimated future value of your newly-improved home).
• Your original mortgage lender still needs to approve this second charge against the property.
• Every bridging loan needs a clear exit: in this case your exit will be a remortgage.

Costs: an arrangement (or completion) fee of 2% (which is always added to the loan), the lender’s admin fee, valuation and legal fees, and your broker’s fee. But a good broker should be finding you a deal that is the most cost-effective option for you.  

A first-charge bridging loan

Your lender may not agree to your extension plans, or agree to you taking out a second-charge loan. Or an alternative financing plan could work out cheaper for you.

The option here is to take out a “first-charge” bridging loan against your property: large enough to pay off your current mortgage completely and pay for the renovations.

• As a first-charge bridge, this will be a cheaper loan.
• It’s still a regulated loan, and works will need to be completed within 12 months.
• Again, your exit plan will be a remortgage.

You don’t want to get to the end of your bridging period and find that it’s difficult to get a new mortgage because you’re already borrowing to the full extent of your income affordability. So your broker will have a mortgage offer already set up for you in the background, ready to be activated as soon as work is repeated and you’re ready to repay the bridge.

Costs: as for a second-charge bridge, above.

Find the right type of finance for your renovation project

Home improvements are always bespoke, and there’s no one-size-fits-all funding solution that will suit every homeowner. To discuss finding the most cost-effective finance for the work you want to do, call us.