Remortgaging for Home Improvements
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Remortgaging for Home Improvements
Kevin Spear tells us all we need to know about remortgaging for home improvements.
How does remortgaging for home improvements work?
It can involve various things, depending on the amount of money being borrowed. Clients can often approach their lenders directly for the money they need for home improvements. But you can also approach a broker. In the same way as when you purchase property, financing home improvements is an exercise of shopping around for the best rates, terms and fees.
It might be part of a remortgage exercise at the end of a fixed rate. It can involve a change of lender. It can involve completely lifting out the mortgage and restructuring it to get the correct term and the required amount of money.
Have you seen an increase in remortgaging for home improvements in the last two years?
Yes, particularly through the pandemic. In the same way as people have done staycations and holidayed in the UK, the public saved something like £125 billion over those two years, according to the Office for National Statistics. So lots of people did things to their houses. They weren’t going on holiday or going out, and instead decided to put an extension on or re-landscape the garden.
We did see a lot of activity in that sector. At the beginning of the pandemic people weren’t moving house either. They were staying put and adding an extra bedroom instead of moving. That was involved in a big proportion of the remortgaging work we saw.
What do I need to consider when remortgaging for home improvements?
It very much depends upon how much you’re borrowing. Remortgage amounts are limited by your income and the value of the property – in the same way as if you were purchasing the property for the first time. Your income has to be able to sustain the existing mortgage on the existing term as well as additional borrowing.
The first thing we need is income verification. The total of the original mortgage and the additional home improvement loan needs to be under a certain percentage of the value of the property. Typically remortgages will go up to 90%, some will go to 95% of the property value, but we tend to try and keep people under 75%, because rates and terms are much better as it’s less risky for the lender.
Is it a good idea to remortgage for home improvements?
Going back to what’s happened in the last two years it’s very much a personal choice. Certainly in some parts of the country, moving house to get that extra bedroom can cost six figures easily, once you’ve factored in the cost of selling a property, buying a property, stamp duty and additional mortgage costs.
If an extension to the property is possible, it can be a very good way of attaining a bigger home for your growing family.
Some of the things people need to be aware of, particularly with things like extensions is that the cost is quite significant. Lenders will ask for pricing estimates from builders, particularly if the loan is over around £30,000. Above this limit lenders become more interested in where the money’s going and what it’s being spent on.
What alternatives are there to remortgaging for home improvements?
This is part of the advice we would offer you. There are a couple of alternative options to explore, such as a second charge. This is a loan from an alternate provider, separate to the principal mortgage. The second charge is a mortgage that sits behind the original one – it’s just a legal term to explain which provider will be repaid first should the property be repossessed.
It has an entirely different set of terms and conditions and rates tend to be a little bit more expensive. You might pay say 2% at the moment on a five-year fixed rate mortgage, but in the second charge space you might be looking at 4% or 5%. It’s quicker and easier than a remortgage and the income multiples tend to be a little more generous.
We’ll look at this option for you. Most of the time clients go with a mortgage company rather than a second charge company simply because of costs and rates.
How much can you remortgage for home improvements?
It’s all about income multiples and loan to value. Remortgages releasing less than £30,000 are pretty straightforward. Lenders just have a caveat that says you can remortgage for any legal purpose – that might be debt consolidation or to buy a car or go on holiday.
Once you reach £30,000, lenders are more interested in the detail, and the value of your property is the governing factor.
Of course, whether you take the second charge or a remortgage the main thing to consider is the overall cost. You’re going to have this loan for a long time. Remortgaging adds interest on top of interest. We will look at the overall cost over the term of the mortgage. It’s one thing to say you need £50,000 for an extension. But the term over which you borrow it greatly affects how much you will repay. If you borrow over 10 years It will cost you one figure, if you borrow over 20 years it will cost you double, broadly speaking, in terms of interest.
Will it cost me to have an initial chat with a broker about remortgaging?
No. In the same way as when people approach us for a house purchase, the initial contact with us costs you nothing. Research into the market about costs, rates and availability is all part of the service that we give prior to a client engaging with us.
If you’re just information gathering, that’s fine. Please do come to us. It’s as important to speak to a broker for a remortgage for home improvement as when you first purchased a property. There is wide variance of choice. Should you go with the existing lender or a new whole of market lender? Or a second charge? Those three options have very different cost outcomes depending on how much you’re borrowing.
Yes, you can go to your high street lender to get a further advance and have the money two weeks later – but it’s worth exploring and speaking to a broker to make sure that you have in fact, got the most cost-effective option. You wouldn’t just consult with one builder for a quote. You’d shop around to make sure you’re getting value for money. The same is true with your borrowing.
How much contingency should I budget for home improvements?
With these projects, and particularly with builds, make sure you are remortgaging for the right amount of money. Maybe add 10% or 15% contingency for the build. The last thing you want to do is run out of money and have to go and get a personal loan for the extra £5,000 or £10,000 because you didn’t remortgage at the right level.
Finally, in these days of supply issues, as well, in the construction and building industry it’s a good idea to pin down the timeline for your build. This can vary a lot in different areas of the country.
Your property may be repossessed if you do not keep up repayments on your mortgage.