Remortgaging to expand your home
Under permitted development rights, you are allowed to extend or change your home without the need for planning permission. If you live in a designated area, then you will be restricted or prohibited from carrying out any changes. However, the general advice is that you consult your local planning authority about your proposed development before commencing any work.
You might be looking to purchase a larger property but it’s too expensive for you to move or prices in your desired location are beyond your financial reach. Some homeowners have taken it upon themselves to make their existing home their castle. The most popular changes are loft extensions, kitchen extensions, extensions, basement conversions, outbuildings, and conservatories.
Costs can vary significantly and you must shop around and obtain at least three quotes from recommended quality builders.
Assuming you have the confirmation from your council that you can proceed under permitted development and you have obtained a quote of £50,000 to carry out your extension, how should one proceed to finance the work?
Find out the current value and post works value of your property. Check on Zoopla, under for sale and sold prices. In addition, check with a few local agents that are familiar with your street. If you are looking to carry out major extensions to your property, a bottom and top extension, or create an additional en-suite bedroom, then inform the agent of your proposed development and find out what the value could be after the works have been completed.
Find out your outstanding mortgage balance. This will enable you to work out your existing LTV. For now, you are working on a current LTV based on current value and not the proposed works.
Your remortgage options are as follows:
A majority of lenders will restrict capital raising for home improvements to 75% LTV. Yes, some are happy to go as high as 85% LTV, but you will have more choice of lenders/rates if your borrowing does not exceed 75% LTV.
As a general rule, contact your existing lender first and foremost. You are not looking to remortgage but you are enquiring about a Further Advance. A further advance is a top up loan / additional borrowing from your existing lender. In a majority of cases, the further advance will be at a different rate to your existing mortgage, but the lender will synchronise the payments so that you just make one monthly payment via direct debit.
For example:
The current market value of the property is £300,000
After proposed works, it is estimated to be worth £350,000
The existing mortgage balance is £150,000 and monthly mortgage cost = £707 per month paid by direct debit on the 28th of each month
Client is on a rate of 3.75%
Bank agrees on further advance of £50,000 for side extension to property. Rate will be 4.59% and term spread over same term as existing mortgage. Monthly mortgage cost= £281
Monthly mortgage cost going forward taken by direct debit on the 28th of each month will be £707 + £281 = £1056.
It’s always best to contact your existing lender first for four reasons:
It’s a quicker process and with some banks, the money could be in your account in days as opposed to weeks.
You may have limited options as a result of lender’s criteria. For example, you are currently on an interest only mortgage and cannot meet current lender’s criteria for an interest only mortgage.
It could be cheaper as opposed to remortgaging to a completely new lender.
You may incur hefty early redemption penalties if you decide to switch lenders.
Once you have approached your lender and they have advised you of your options, before you proceed to sign on the dotted line, approach another lender or an independent mortgage broker to see if they can provide better terms.
The job of the broker is to ascertain whether you are better off borrowing £200,000 from a new lender, i.e., to pay off your existing £150,000 mortgage and £50,000 for your side extension, or proceeding with the offer from your existing lender.
For example, a new lender may agree to lend £200,000 at 2.39%, monthly cost = £887. As such, you get savings of £169 per month! Interest rates may have fallen since your last mortgage and you could potentially increase your borrowing but your monthly payments are lower than your existing mortgage.
Supposing you don’t have much equity… For example:
Existing mortgage is £212,000
Current market value is £300,000 (71% LTV)
Property extension cost is £50,000. As such, total cost will be £212,000 + £50,000 = £262,000 (87% LTV)
But after works, the value is £350,000. As such, £262,000 on £350,000 value = 74.8% LTV.
So long as a surveyor confirms that the property will value for £350,000, then lenders will consider lending you the extra funds. They may retain some of the extra funds until the work is completed. For example: Lender advances £249,500 and retains £12,500. On completion of the works, the property is re-inspected and the balance of £12,500 is remitted to your bank account.
Documents/Information
The following documents and information will be required from the outset:
Planning permission and approval documents and planning drawings (if applicable)
Building quotation/estimates for works
Current valuations /Comparables of existing properties (current and post works)
Existing mortgage balance and confirmation of early redemption charges
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
The Financial Conduct Authority does not regulate most types of buy to let mortgages, bridging loans, development loans and commercial loans.
