How to finance home improvements with a mortgage

A property should have two bathrooms for every three bedrooms to maximise its value and desirability. That’s according to 70 per cent of real estate experts from across the UK who were quizzed by Direct Line Home Insurance. On average, they estimated an extra bathroom could add just under 7 per cent to the £174,340 average value of a three-bed property – a boost of almost £12,000. Of course, the figures change significantly depending on where in the country the home is located. For example, the extra bathroom could add £26,485 to the value in London but just £5,967 in Liverpool. With the average cost of installing a new bathroom estimated to be between £4,000 and £5,000, the UK average added value of just under £12,000 would result in a return of between 140 and 200 per cent. If you’re planning to add to your home – be it a bathroom, kitchen, bedroom or loft conversion – but can’t afford to pay for it in cash, there are three main mortgage options for financing an extension. Further advance ‘Firstly, you could look for a further advance from your current lender,’ says David Hollingworth from London & Country Mortgages. ‘This essentially tops up your current mortgage with lending at current available rates. Depending on the lender, that may be offered at the rates available to new customers at the time, or could be from a specific range of rates for further advances. This method could suit those who are currently tied in with early repayment charges. ‘Alternatively those with an exceptionally low rate – such as a pre-crunch lifetime tracker – on their existing mortgage may want to retain that rate and topping up with a higher rate may make sense.’ To give an idea of what you might have to pay, Barclays currently offers further advances at 1.28 per cent fixed for two years with an £849 fee for borrowers with a 20 per cent equity stake in their home, or 1.23 per cent with £1,249 fee. Halifax’s further advances vary with requirements and loan size but for sums of less than £100,000, a two-year fix at 75 per cent loan to value is 2.24 per cent and there’s no fee. Remortgage The second option is to shop around the whole market and remortgage your existing home loan and raise additional capital to pay for the work in the same deal. ‘Lenders will ask what the funds are for but should be happy for a capital raise for home improvements,’ explains Hollingworth. ‘This method helps mitigate the cost of the additional borrowing by ensuring the whole borrowing is on the best available deal. It also avoids having two elements of the mortgage with overlapping early repayment charges.’ However, before remortgaging, you should first consider whether you are currently in a deal period ‘as there may be hefty redemption penalties to pay,’ advises Charlotte Nelson from personal finance website Moneyfacts.co.uk. These penalty fees can easily be 3 per cent of the total loan. In terms of remortgage deals currently available, at 80 per cent loan to value Sainsbury’s has a 1.34 per cent rate with £995 fee, Barclays 1.38 per cent with £999 fee and HSBC 1.69 per cent with no fee. All these have free valuation and legal work for remortgages. Second charge ‘If you can’t get funds from your bank or building society, you could take a second charge mortgage,’ says Aaron Strutt at Trinity Financial. This allows a borrower to access equity built up in their home to use as security for another loan. ‘Taking out a secured mortgage will mean there are two mortgages on one property with the main mortgage always taking precedence,’ Nelson explains. While it used to be largely the case that affordability criteria was a bit more relaxed than those of the standard mortgage market, the Money Advice Service says these lenders now have to make the same affordability checks and ‘stress test’ borrowers’ financial circumstances as an applicant for a main or first charge residential mortgage. So borrowers have to provide evidence that they can afford to pay back this loan. Paragon Bank and Masthaven will lend to homeowners with at least 35 per cent equity in their property at a rate of 3.73 and 3.74 per cent, respectively, according to Moneyfacts.co.uk.