Remortgaging can be arranged quite easily, although it is not always in your best interest to do so.
There are multiple ways to raise finance and the best method is the one with the lowest interest rate. That’s always going to be a secured loan option, as unsecured debts incur higher interest rates.
To get the right type of finance in place, it depends on the reason you want to remortgage for a home improvement project. As you’ll be releasing equity from your home, lenders will ask you why.
This helps to ensure that you get the right product. For a large development, such as a loft conversion, extension, or a new kitchen, a remortgage usually makes sense. For smaller projects, it may be that an unsecured loan would suit you better.
The key difference is that a secured loan takes longer to repay, but it has lower monthly interest, whereas unsecured is repaid faster, at a higher interest rate.
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This is one home improvement project where it’s worth considering what you need and what you want, along with the possible home valuation increase to determine how you finance a new kitchen. That being said, it’s never a good idea to base financial decisions on future home valuations as they’re very speculative.
Estimates from goodtoknow.co.uk put the average price of a kitchen at around £6,000. This is for a no-frills new kitchen and will get you what you need, but not necessarily what you want.
If what you’re after is a budget kitchen, such as from B&Q or Ikea, using local tradespeople for fitting and a combination of DIY, remortgaging isn’t likely to be the best way forward.
That is unless you’re out of your current mortgage deal that’s reverted to a standard variable rate, and you have enough equity in your home to release by manipulating your loan-to-value ratios.
As an example, if you’ve already paid down a large proportion of it, such as being under 50% LTV, then remortgaging on a 60% LTV deal, could release some cash and make financial sense.
There is one scenario when it’ll make complete sense to consider remortgaging for a new kitchen and that’s to get you your dream kitchen designed, supplied and fully fitted.
This can bring costs into the tens of thousands when you factor in for design fees, electrical rewiring if required, multiple tradespeople, units, appliances, new tiled flooring and all the other optional bells and whistles.
Should you be fitting a bespoke kitchen, professionally designed and fitted, then remortgaging is likely to be the most way to finance it.
Our advisors will compare the whole of market remortgage deals to find you the most cost-effective way to fund your dream kitchen.
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A loft conversion is a sure-fire way to increase your properties worth. It costs thousands though. For a basic conversion,
HomeBuilding.co.uk estimates the cost to be around £20,000. A logical way to finance that is to remortgage your home, freeing up some equity you have and using that to pay for a loft conversion.
Of course, being on the top-most floor of the property, it’d make sense to go all in and add an en-suite bathroom to save trips up and down stairs. Adding an en-suite to a loft conversion is estimated to increase the cost to around £35,000, at which point, a secured loan is usually the only way forward.
Unsecured loans are only available on up to £35,000 and have to be repaid within a maximum of seven years. Therefore, there’s going to be high monthly payments involved with using personal unsecured finance. If you’re going to be including an en-suite in your loft conversion, requiring above £35,000,
There are only two ways that can be financed:
By placing a second charge on your mortgage:
This is the secured loan option. Your mortgage remains as it is. That’s a first charge on your mortgage and will remain there until it’s repaid. Using a secured loan, a second charge will be placed onto the Title Deeds of the property.
It just means both lenders would have the right to repossess if you were to default on the repayments. If that did happen, the mortgage would be repaid first from the sale of the property, and the second charge lender would get what was left of the funds.
There is a higher risk to the lender still, so the interest rates on second charge loans are higher than standard mortgage rates.
Remortgage by moving to a different product:
This will involve switching from your existing mortgage. It doesn’t necessarily mean you’ll need to move from your existing lender. They may be able to offer you an alternative mortgage product.
This is (usually) the most attractable option however it relies on your existing mortgage not being locked into a fixed term.
If you’re currently within the introductory rate or discounted fixed rate period, there’s likely to be exit fees attached. Should that be the case the cost to remortgage would increase, so it’d need careful consideration to determine if it is the best way forward.
Provided you can move to a different product without incurring high penalties, a loft conversion is a proven way to increase your property’s valuation, so it is an investment that can pay dividends.
Just last year, the Press Association reported in the Guardian…
“A home extension or loft conversion could increase a property’s worth by about 22%, or £42,700. Meanwhile, adding a decent-sized extra bedroom has the potential to boost the value of a home by 11%, or £22,100.”
Going by those figures, it’s clear that what you put in really does pay you back tenfold.
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Any type of secured financing takes into account your current debt-to-income ratio. As property renovations generally tend to add value to your home, sometimes before starting the project, it makes complete financial sense to use a combination of personal savings and unsecured personal debt to raise the capital required.
The common reason this approach is taken is because of the increased property value after the renovation’s complete. It should mean you can free up more of the equity in the property, due to the increase in the valuation.
That becomes problematic fast when you get to the remortgage stage. The reason being, renovations can get pricey and the majority of lenders want your debt-to-income ratio to be below 45%. And they don’t care why you racked up the high debt levels up either. If it’s above that 45% threshold, you’ll be ruled out of any secured loans, because it looks on paper as though you’re living beyond your means.
The fact your credit files can show you’ve had a blemish-free history with credit, having never defaulted on anything; still projects the sense that you’ve borrowed more than you may be able to comfortably repay.
Should your debt-to-income ratio be higher than 45%, and you’ve used any savings you had tucked away to pay those debts down, and still find it problematic to raise the finance you need for what’s essentially a debt consolidation loan, you really need to use a mortgage broker.
Call centre staff and even the clerks in the main banks do not make decisions. Applications are a computerised process and it’s one that’s tremendously unreliable as it rules out people who are making perfectly sensible financial decisions to avoid high interest bearing unsecured debts.
The advisable approach to take at this stage is to work with a mortgage broker who can work directly with the underwriters to make the finance arrangements necessary for your individual circumstances..
As specialists in the remortgage market, we do cater to a wide variety of circumstances to get your home improvement project financed and underway.
Should you want to remortgage to extend a property in any way, there’s some solid groundwork needs done before you consider your finance options.
It’s definitely cheaper to extend than to move to a larger property, but to make sure that is the case, you need to have all the pertinent information and the true cost projections before you put finance in place. Otherwise, you’d run the risk of over-borrowing, or worse still, underfund your extension.
Besides that, many lenders won’t entertain a loan application that hasn’t been thoroughly costed. When you apply for a remortgage, lenders will ask what your intentions are. Extending a property is a big project, and therefore considered risky if proper planning hasn’t been done.
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The costs you need to factor in before considering a remortgage application are not just for the building work. You’ll also have fees for architects/designers, planning permission fees, building regulation inspections, and the one that you do not want to forget is to add on 20% to allow for the VAT on all services. In addition, it’s wise to have a financial cushion to allow for unforeseen costs.
Do you need planning permission?
The simplest way to find out if you need planning permission for any development you’re considering, is to speak with a planning officer at your local council borough.
For those in England, another option is to use the Interactive House planning tool at PlanningPortal.co.uk.
Further information about when you need planning can be found at the Home Owner’s Alliance Website.
Before looking for remortgage quotations for a property extension, definitely speak to your local council’s planning department first because if you do extend your property, thinking it’s within your permitted development rights, only to find out later that it’s not, you can be served an enforcement notice, forcing to you to have the work undone.
Should you live in a conservation area, your property is likely to have what’ s called an Article 4 Direction placed on it, which essentially means that anything you want to do, requires the consent of your local authority. There are no exemptions.
How much does a planning application cost?
Planning permission application fees vary dependent on where you live. The fees listed below are for “extending a single dwelling house”.
In England, the fee for this is £172.
In Scotland it costs £202.
In Wales, the fee is £190
In Northern Ireland, the fee is £285.
All fees are reviewed periodically, so these will change.
For further information on planning permission, application forms, processes and advice, you can select the link below that’s relevant to your area:
These fees vary greatly and can cost up to 7% of your total project cost. You’ll want to shop around at this stage as there are some local architects and designers that will provide a free initial consultation, whereas others will charge for a consult.
The Real Homes Magazine has a thorough breakdown on what’s involved in the process of planning and building an extension on UK properties, which you can find here.
Once you have your cost projections, and know how much you need to borrow to fund your extension, that’s when to consider your finance options.
At this stage, it’s beneficial to ask for quotations and not to actually go through with a remortgage application. The reason for this is that you want to find out first if you’re eligible for the product before going ahead with a full application, as they will leave a mark on your credit file, whether it’s approved or not. A quotation search will check your eligibility first and will not affect your credit rating.
Rejected finance applications make it difficult to obtain finance and will also affect the interest rate you can borrow at.
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All mortgage deals are based on a loan-to-value ratio. That’s usually 85% and under, although it can be higher. When you’re borrowing to extend your property, the majority of lenders will only allow you to borrow based on the current market value of your property. Not future valuations.
Should you have an existing mortgage with a high LTV, you may be finding it difficult to obtain the full finance needed for the extension. Should that be the case, there are mortgage options available whereby the funds are released in phased stages.
This type of funding is mostly applicable to renovation work, usually for uninhabitable properties in order to make them habitable as it’s not possible to get a mortgage product on a home that can’t be lived in. However, it may be an option worth considering if your current mortgage is making it difficult for you to get the finance you need.
By remortgaging your home, you are essentially extending the longevity of your home loan. That will increase the total amount of interest you pay over the entirety of the loan.
Due to the high expense, it’s always worth planning ahead so you know what your new repayments are before you enter into deals and find out ahead exactly how much it’ll cost over the full term you remortgage for. You can increase and decrease your repayment periods when you switch.
There is a calculator available at the Money Advice Service that you can use to work out how much switching your mortgage will cost.
Any mortgage calculator will only give you projections, which won’t cover every cost. There will be arrangement fees need paying, sometimes legal fees, and if you’re currently locked into an existing rate, you may have early termination fees that are payable to your existing lender too. Mortgage calculators generally don’t include these fees in the total cost projections.
To get a breakdown of the true costs to remortgage, our advisors will do all the calculations for you, and give you the actual cost and best deals available from across the entire market.
The above details should provide you with enough guidance of costings and what’s involved for a variety of home improvement projects.
For relatively low-cost renovation projects, it can be more affordable to use a general home improvement loan, available from the vast majority of lenders, depending on your circumstances.
Larger projects though, such as the type that generally tend to increase your properties value - will cost more and as such, require the most affordable form of long-term finance. In the majority of cases, that’s when a remortgage is perfectly suited.
Whatever funding you need to improve your home, our advisors will discuss with you all the available finance options you have at your disposal, and advise on the most cost-effective way forward.
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The amount you’ll be able to borrow will be determined by a couple of factors:
1) Your ability to pass an affordability test
This is a mandatory requirement of all home loans. It takes into account your total income and expenditure.
Nationwide have a mortgage affordability calculator here you can use to get a rough guide of how much you could borrow, but bear in mind, this is only for Nationwide. All lenders have different lending criteria, so you may be able to borrow more or less than the figures shown, depending on which lender you choose.
The important aspect of the affordability test is that you’re able to afford the repayments. Some lenders will stress test your ability to repay if the interest rates rose by 3% above your offered rate, whereas others may not be as high.
2) Your home’s current valuation and the amount of that you own
The housing market fluctuates and as such, the value of your home can increase as well as decrease. When the valuation increases your loan-to-value ratio on your existing mortgage decreases. That means the total amount of equity you own, increases.
By remortgaging, you’re able to release that equity. It’s similar to if you were to choose to sell your property, you’d sell it at market price, pay your existing lender what’s remaining on the mortgage, and keep what’s left after the sale.
By remortgaging for home improvements, you’re essentially selling your equity rather than your home. As an example, if you bought your home for £100,000 and it’s increased to £125,000 since then, you can remortgage at the current market value, pay your existing mortgage off and move to a new mortgage, thereby releasing the £25,000 equity you now own, without having to sell your property.
The opposite can happen though if the value of your home has decreased. Especially if it’s to the point when you’re in negative equity, which is when the amount you owe on your property is more than what your home is worth. That will make it more difficult to obtain most types of finance.
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