Whether you’re building upwards or digging deep, we look at different ways to finance a project

Many homeowners are extending their homes because they can’t afford to move to a bigger property. For those not fortunate enough to pay for building work from their savings, what is the best way to finance this project? Should you take out a personal loan, ask to borrow more from your existing lender or remortgage?

Extend your mortgage

For homeowners who need to borrow a large amount (above £25,000), one option is to apply for a further advance from your existing mortgage lender. Remortgaging allows you to release equity in your home. This frees up money that can be used to finance your new extension or loft conversion. But it’s important to think carefully before remortgaging.  It’s a long-term decision.  Interest rates are at a 15-year high in 2023, so you will probably pay higher interest rates. It will also increase the total repayment amount and potentially mortgage term. What happens if your income was to fall? Plus, you will incur fees and costs.

Second charge mortgages, also known as secured loans, allow homeowners to borrow against the increased equity in their home while retaining their existing mortgage. For example, if you have an outstanding mortgage of £150,000 on a house valued at £400,000 and wanted to borrow £50,000 to extend your home, there is the possibility of consolidating the two debts into a single monthly payment. In most cases, you can continue your original borrowing on the existing rate while taking out the extra £50,000 as part of a second mortgage on new rate terms. Second mortgages usually come at higher rates compared to primary mortgages. And it will mean taking on second mortgage loan repayment, increasing your debt burden.

Remortgaging is based on the same affordability criteria that you would have been required to pass when originally taking out your mortgage. This involves submitting details of your income and outgoings to the lender as part of your application.

Remortgaging can be a good option for someone who has been in their property for a few years and paid off a chunk of their mortgage and who may also have increased their earnings. It’s likely to be the cheapest way to borrow a large sum. Remember you home may be repossessed if you don’t keep up with repayments.

Specialist renovation mortgages

If’ you’re buying a derelict, historic or timber-frame building that needs significant work, you may qualify for a renovation mortgage. High street lenders tend to only offer mortgages on habitable properties. This can make it tricky to find the funds to complete extensive renovation projects.  Specialist renovation mortgages are available for buildings that require a significant amount of work, such as historic or fire-damaged properties and non-standard construction types like thatched roofs and timber frames.

Under a specialist renovation mortgage, the money required to buy and renovate the property is released in stages. Typically, the lender will lend up to 90% of the purchase price or value of the property and then the additional money required to extend/renovate it.  You would need to provide a fully costed schedule of works which can help you budget and plan the work. And the value of the house would need to be well above the purchase and building costs. Smaller lenders dominate this market – see Ecology Building Society and BuildStore.

When the renovation/extension is complete, it may be possible to lower your interest rates.

Bridging finance

A bridging loan is a short-term loan that helps you to “bridge the gap” when you want to buy something but are waiting for funds to become available from the sale of something else. Bridging loans may be used by people to buy and possibly extend a new home before selling their existing property. A bridge loan can make moving home go more smoothly. You don’t need to move twice. Whereas if you sell your old home before moving to the new one, you’ll likely to need to live in rented housing.

Bridging loans tend to be very expensive compared to other types of loan. The amount you can borrow will depend on the value of your property and your credit history. Lenders offer loans up to 80% of your home’s market value. And they will usually expect you to clear the debt within one year. As you’ve not sold your current home yet, you may be making two mortgage payments for many months. Because of the debt burden, bridge loan lenders tens to have strict credit and debt-to-income ratios rules.

As with remortgaging, there will also be arrangement, admin, legal and valuation fees to pay. And your home is at risk if you fail to repay the loan as agreed.

Loans

Personal or unsecured loans are a relatively easy way to access smaller sums of money. Approval can be instant with online banking.  When applying for a personal loan, lenders will usually consider your credit score. If you have a poor credit rating, companies may still consider lending you money, but you will be seen as higher risk, and so the interest rates will probably be higher too.

Some companies will lend up to £50,000, according to the credit reporting company Experian, though less than £25,000 is more common.

Unsecured  loans aren’t connected to the value of your home, so your property won’t be at risk if you fail to keep up with repayments. However, they typically come with higher interest rates than secured loans, so are not the cheapest way to borrow money. Check out the different rates on Comparethemarket.com

Secured loans, meanwhile, allow you to borrow larger sums than unsecured loans and tend to charge lower interest rates than bridging loans. But as with bridging loans and remortgaging, your home is at risk if you fail to keep up with repayments.

There are lots of loans available so don’t just pick the first you find. Go compare. Remember to check the interest rates and what fees are included before signing on the dotted line. Each person’s individual circumstances are different, so it’s a good idea to get independent financial advice on the best options for you. 

If you are considering extending or altering your home, you may find some of these services useful: