Remortgaging for Home Improvements

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Remortgaging for Home Improvements

This episode of the Mortgage and Protection podcast looks at remortgaging for home improvements, with Richard Campo from.

How does remortgaging for home improvements work?

The short answer is that it’s the same as any normal mortgage in terms of getting approvals. Banks will always look at how much you can afford and what equity is in your property.

As a longer answer, there are three ways the funding can work. First, you can get a ‘further advance’ where you stay with your bank and get an additional loan to pay for the work.

The second option is a remortgage, where you go to another bank for a new mortgage deal. Let’s say your current deal’s up in April, your mortgage is £150,000 but you want to do £50,000 worth of home improvements. You simply apply for a new mortgage of £200,000 and then on completion of the new loan you receive a £50,000 payment.

The third option is to get another type of funding. The most common one is a ‘second charge’ that sits on top of your current mortgage. You can also look at using credit cards and personal loans, because it isn’t always a great idea to secure money against your property.

What drives the type of loan you choose is the work that you want to do. The types of work neatly fall into three categories as well: One is cosmetic work – so decoration, gardening, changing your kitchen and bathroom. The second is more structural, where you’re moving a wall or changing the property in some way. Most lenders are happy with this, including things like rear extensions, side returns and loft conversions.

Beyond that is ‘development’ work where you definitely need permission from your bank and that might preclude most high-street banks. You will probably have to work with a more specialist lender.

Are more people doing home improvements since the pandemic?

Yes, it’s been a huge trend. Even now, coming into the start of 2022, there’s not a lot of property around. People are looking to move but there’s not enough property to buy.

So lots of people are choosing to improve their current property. Lockdown was a huge driver. If you were doing many hours in an office you weren’t really seeing your home, whereas being at home 24-7 made you notice things and decide to make changes.

What do you need to remortgage for home improvements?

When I started doing mortgages, my boss said that there were three Cs in mortgages: Commitment, Collateral and Capacity. Collateral is the actual property. For example, if you’ve got a thatched cottage or a listed building you might not be able to do what you want to do, which is why banks aren’t so keen on those properties.

The commitment is how likely you are to repay the loan – so if you’ve missed payments in the past that’s an indicator of your commitment going forward. Make sure you’re paying your bills on time, and if you have had credit blips, talk to a broker to find the right bank for you.

Capacity is what’s now called affordability – how much can you borrow. You can usually get anywhere between 4.5 to 5.5 times your income. What also falls into this is the percentage of the property you are borrowing. If you’ve got more than 40% equity in the property, you will get the cheapest deals on the market.

Your limit will probably be up to 90% of your property value for home improvements. The other caveat is the value of the property itself. If it is worth over £1m you might struggle to borrow more than 85% for example. Over £3m that will be 75%.

In a nutshell, the two big drivers are your income and the level of borrowing against your property.

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Can I take equity out of my house for home improvements?

The first ever building society was formed in 1775 where people clubbed together to buy property. Initially, lending was only for purchases, but that changed over time. It was uncommon even in the 1990s to borrow money on your property for anything other than home improvements.

But today, you can borrow for any legal purpose. It’s still a fairly recent development that you can borrow against your property for any reason other than home improvements.

Is it a good idea to remortgage for home improvements. What are the pros and cons?

It’s not right for everybody. A mortgage is typically over a very long period of time – the maximum mortgage term is 40 years. So if the borrowing is fairly short-term, is it better to have a loan, a credit card or a second charge rather than borrow on your mortgage?

Do you want to borrow £50,000 over 20 years, or will you be able to pay it off more quickly with a bonus? A personal loan has a higher interest rate, but if you pay it off in two years you will spend less than you would over 20 years. For many people remortgaging is the most suitable outcome – but not always.

Also, ask yourself whether what you’re doing will add value to the property? There’s a rule of thumb that for every pound you spend on a property you get £2 back. I did a lot of work to my house a couple of years back and we spent about £75,000 – and the property value did indeed go up by £150,000. But we do see a lot of ‘vanity projects’ that might not make financial sense.

Are there any alternatives to remortgaging for home improvements?

We’ve talked about using loans and credit cards as other options, but one thing we haven’t touched on is closely linked to when your current mortgage deal ends.

Let’s say you took out a five year fixed rate mortgage one year ago, so you’ve got four years left to run. It doesn’t make sense to remortgage because that will trigger big early repayment penalties.

An option in this situation is a ‘second charge loan’ that sits on top of your mortgage. But when your fixed rate deal finishes in four years time, you can remortgage the whole thing in one.

Think about how long you need the money for, and how much you will spend over the period you need it. That’s where shorter term options like credit cards or personal loans can work. There are a lot of zero percent credit cards right now, so if you can utilise that option, do – that’s basically free money for 12 to 18 months, depending on the provider.

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Our key aims are to fully understand what you are looking to achieve, create a solution tailored to your needs, deliver results through an excellent service and build a relationship for life.

How much can you remortgage for home improvements?

The general rule is you can borrow up to 90% of the property value. But this is dependent on property value and your income. So just because a bank offers 90% loans, it doesn’t mean your income will get you there.

The value of the property is a big factor. In London and the home counties we deal with high value properties and some banks will be a bit more conservative with these.

One of our clients is buying a house in Kensington and spending half a million pounds doing it up. We’ve agreed ‘stage drawdown,’ as they don’t need all that money on day one. There are five stages to the build. They’re kicking off stage one and then the bank will pay for stage 2 to 4. Each time the client pays their builder, it increases the mortgage balance.
The benefit there is that they’re not paying interest on money they don’t need yet, so it’s more cost-efficient. This project is in the ‘development’ category I touched on before. Doing the work in a staged drawdown way is less risky for the lender, so you can often borrow more this way.

What other advice do you have?

I would just say that while remortgaging for home improvements seems simple, it can get quite complicated. You need to think about how much you need to borrow, when your current mortgage product is ending, how to structure the works, the most cost-efficient route and finding the most suitable lender.

Because of all those complexities, please do talk to a broker. We’ll do all that thinking for you and run all the calculations. Based on the work, the costs and we’ll compare your options including credit cards and other routes.

From a practical point of view, banks have more products available through brokers than going direct so it really is a win-win to seek our advice. We’ll take some of the stress away and make sure you’ve considered everything.

Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

A fee of up to 1% of the mortgage amount may be charged depending on the individual circumstances (i.e. £1,000 on a £100,000 mortgage). A typical fee of £495 is payable upon offer of the loan. We will also be paid a procuration fee from the lender. The amount of the procuration fee will be disclosed to you. You will receive a Mortgage Illustration which will tell you about any fees relating to a particular mortgage.