Financing home extensions

Borrowing money against your home for the purpose of home improvements in my opinion is the most savvy way to finance a renovation second to funding from your own income and savings.

Things you need to ask yourself when approaching this situation are -

Will the intended works add value to my property?
What is the most cost-effective way to borrow the required funds? Is it via a remortgage, a further advance, a second charge or a personal loan?
How will this affect my loan to value (the size of my overall borrowing versus the value of my property)?
Have I accurately calculated the cost for the intended works?

A qualified broker with experience in this particular area should easily answer these questions sufficiently for you.

If holding cash, this will normally be the best option for financing an extension because you won't pay interest as you would borrowing - it's always my first recommendation.

Unsecured personal loans can be a viable option due to low set-up costs and rates - however, to access the lowest rates you normally need to have an impeccable credit rating. Personal loans are normally capped at 5-10 year repayment terms.

With your mortgage, you may be restricted to using your existing lender if fixed into a deal, but will be able to borrow for longer. Normal underwriting will apply. Secured loans can be the most flexible in terms of equity needed, more flexible on credit ratings and flexible on terms - but for all of this flexibility, comes the cost. Interest rates and set-up costs here are normally the highest of all options.

Extending or renovating a property is an expensive business and how to finance it is an important question. Not financing it at all, by using cash savings, is the lowest-cost option but is unavailable to many. So looking at some form of mortgage borrowing becomes the next option, as it is paid back at a lower rate of interest and over a longer period than a personal loan, the repayments are generally more affordable. A remortgage (if you have no early repayment charge with your current lender) is usually the best option, but if you do have an ERC then additional borrowing with your current lender is the next best thing. If you are not able to do that then you can still look at a second charge loan; which is essentially a small mortgage from a different lender than your main mortgage, they are more expensive though.

All the mainstream lenders will assess a loan application on the property's current condition, not the after works value and also very few agree stage payments. If there is an existing mortgage in place check to see what rates the incumbent lender will offer and check if the borrower is eligible. Compare this against a complete remortgage to a new lender and also taking a secured loan. The borrower can then ensure they are borrowing on the best terms possible. If it is a major project and the afterworks figure is needed it may be necessary to consider short-term financing, this looks expensive but it may give the funding necessary and in stage payments with a refinance to repay at the end of the project. Speak with an independent adviser who can provide comparisons and a recommendation without the borrower wasting shoeleather.

The preferred option with my clients has always been to release equity from their current property in the form of a remortgage. This will be a safer and cheaper option due to rates generally being lower than other forms of refinancing and the ability to have a longer term. It also means the extra borrowing has been stress tested and you are borrowing within a LTV criteria meaning you will have equity in the property.
The most dangerous option is funding the property with loans and credit cards hoping that the home improvements will increase the property value to be able to remortgage at a later stage. With property prices expected to decrease you may in a position where you don't have the equity to cover the loans and credit cards.

Splash the cash. With the current state of interest rates on loans and mortgages, there has rarely been a more logical time to use cash savings for home extensions and renovations. The paltry interest rates that savers are receiving currently are nowhere near enough to offset inflation let alone provide growth. So not only will you improve your standard of living but in the long run, it stands a better chance of making you a return!

The dangers of any secured loan are that you risk losing your house if you don't pay. Dont take on more than you can handle, pay on time every month and you will be fine.
Depending on your circumstances, a secured loan, a remortgage for a higher rate or another type of finance may be suitable, but please do get advice as the wrong type may get you in trouble.
Affordability must be considered, when the loan is on your home, it is regulated and this is part of the process, without these checks, you are putting yourself and your home at huge risk.
The moral of the story is, get advice! Consider the advice and then get a second opinion. dont risk your home when other more viable options may be available.

These are usually bridging loans which have much higher interest rates versus a standard mortgage. Typically with a 12 month maximum term so works need to be completed promptly. It’s important to build in a buffer in case of delays. Consider how long the improvements take and your cash reserves? Will your current lender allow you to do these works? Usually if it’s not heavy refurbishments your current lender will allow this and then may provide you with a further advance rather than having to get a bridging loan. Loan amounts usually go up to 75% gross LTV. After fees netting down to around 65%. As this is secured on your main residence the lender will do additional checks such as checks on your credit rating, income expenditure however these are not likely to be as strenuous as those that would be done on a residential term mortgage.

Securing funds on a property inevitably carries a risk, as you are essentially putting your property forward if you fail to maintain your payments. We would always recommend talking to specialist regulated funding experts that can review your standard residential mortgage avenues, but also your specialist self-build and development finance. When you are reviewing renovations it is essential to consider both the short term and long term, i.e. what do you want to achieve when the works are done, do you want to extract more out of your property to invest in a development or rental property, or perhaps you want to reduce the borrowing.
Depending on the avenue some lenders will have a heavy focus on income, however, with the right exit route this can be less of a concern for lenders, either way it is a discussion to have with a specialist!