Should I remortgage for an extension?

If you don’t want to upsize but need more room, a home extension can make sense. But should you remortgage for an extension?

The answer depends on your personal situation. If you have plenty of cash in your savings account and the extension isn’t major, it might make sense. But most people don’t have funds readily available for such large projects.

Unsecured loans or credit cards could mean paying higher interest rates so a remortgage could be the answer.

A remortgage for an extension: how it works

Anyone who has bought a home knows that when fixed deals come to an end, you can remortgage your property. We’ve written about it in an earlier blog. But remortgaging can also release equity. Equity is the percentage of the property that you own outright. Let’s say your property is worth £200,000 and you have a mortgage for £70,000 – that means your equity is £130,000.

You can unlock some of cash tied up in this equity to use as you wish. And one way to spend it on is for building an extension.

Why remortgage for an extension?

With increasing interest rates and material prices rising, an extension isn’t cheap. But it should, in theory, be cheaper than a new, larger property. In the long run, it will give you the extra space without house-hunting. Interest rates on mortgages are usually lower than credit cards and other loans. But remember, mortgages are home loans that you pay over a long period of time, so the overall interest could end up being higher.

Another benefit of building an extension is that it can add value to your home. A three-bedroom house with an extension that creates a double bedroom with an en-suite can add up to 12% to the property’s value!

Increasing the value of a property also increases the amount of equity you own. But always be aware that properties have a ceiling price. Check out how much nearby houses have sold for, using website such as Zoopla, to get a picture on prices. If similar houses in your area seem to hit a certain limit, you may not get back what you put in if you’re extending just to increase value.

When should I remortgage?

Most people need to remortgage to extend their property before work begins. But if you can access cash for the work upfront, you can choose to mortgage before or after.
Remortgaging after the extension is built means you might access a better deal. This is due to the value of the property increasing. And, of course, the more it’s worth the more the value of equity you own.

But it could be a risk to wait because your mortgage application might be refused, leaving you out of pocket. Speaking to a mortgage broker, like The Mortgage Dog, is probably the best first step. We can give you the best advice as each person’s circumstances are different.

What are the alternatives?

Remortgaging isn’t the only way to fund an extension, of course. There are other ways, including.

• Paying on credit card. You will get some protection if the builder doesn’t turn up. But interest rates are high on credit cards so it’s not a cheap option!
• Arranging a secured loan. Some people prefer not to secure a loan on their property as your home is at risk if you don’t not keep up repayments on a mortgage. Instead, they take out an unsecured loan from a bank or other lender. The loans are based on your credit score alone, and not the equity in your property. And interest rates are usually higher than a mortgage.
• Taking out a second mortgage. Also known as a secured charge loan or further advance, you keep your current mortgage as it is. Then, you take out a separate mortgage with a different provider. The interest rates might be higher than your current mortgage, but is likely to be lower than those on a personal loan or credit card.
• Using savings. If you have enough available, then this is a good option. You won’t be paying for interest but, of course, you won’t have the cash available should you need to fund anything in an emergency.

What next?

If remortgaging for an extension is for you, then contact a mortgage broker for help. Mortgage brokers can access deals that lenders do not offer via websites or through their own bank or building society. We’ll talk you through your best option, so contact us today for a chat.

Your home may be repossessed if you do not keep up repayments on your mortgage.