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Remortgaging for home improvements

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 Introduction

Many customers contact us because they want to remortgage to raise money for home improvements and the great news is that there are lots of options to fund the work you want to get done.

In this article we talk about how to remortgage for home improvements and discuss the main factors and considerations.

We cover a range of topics in the article, including:

  1. Remortgaging to make home improvements
  2. Remortgaging for an extension
  3. Remortgaging for renovation
  4. Remortgaging for loft conversion
  5. Remortgaging if you're self employed
  6. Remortgaging a buy to let

For each of these situations, there are a number of factors that will impact your choice of mortgage and we will provide you with information about each of those factors.

These include:

  • Equity
  • Affordability
  • Credit history
  • Property types
  • Personal circumstances
  • Other factors

Should I get a home improvement loan or remortgage?

This is one of the first questions that people ask, and the answer is that it depends on your individual circumstances. Think about the changes you want to make to your home and how much they will cost. How much do you need to borrow and what are the rates available for a remortgage or home improvement loan?

Your options

Type of loan

 

Remortgage Release equity from your property by increasing borrowing on your mortgage.
Secured loan A loan that is secured on your property but is separate to your main mortgage.
Unsecured loan A loan that is not secured on your property or any other type of asset.

If you have equity in your home and you are able to remortgage to do home improvements, you may find that a remortgage can be a cheaper way of borrowing larger amounts of money.

You should think carefully before securing other debts against your home and we work with specialist advisors who will be able to guide you through the most appropriate option for your circumstances.

In this article we will cover some of the considerations if you choose to remortgage to pay for home improvements.

Remortgage to pay for home improvements

“Can I remortgage for home improvements?” is a question we are asked on a regular basis, and the short answer is yes. As long as you have equity in your home and can afford the repayments, it is definitely possible to remortgage for home improvements.

First, decide what type of home improvements you want to make. Are you just thinking about decorating the property, are you fitting a new kitchen or bathroom, or do you want to remortgage for building work?

Once, you know exactly what you want to achieve and how much it will cost, you can do some quick sums to work out whether a remortgage for home improvements is the right fit for you.

Hypothetical Example

Your home is worth £350,000 and your current mortgage is for £175,000. You would like to raise £25,000 to knock down an internal wall, fit a new kitchen and decorate.

You could switch to a new mortgage for £200,000, which would provide the funds you need to pay off your existing mortgage and give you the £25,000 you need to make the changes to your home.

When is the best time to remortgage – before or after the work?

Remortgaging to pay for home improvements is something that people usually do in advance of carrying out the work. However, if you have the cash to pay for the work in the short-term, you might choose to remortgage after the home improvement work has been carried out because, depending on the changes you make to your home, you could increase the value of the property, which might mean you have access to more equity for a remortgage. The benefit of this would be that you’ll potentially have access to a wider range of products and thus cheaper rates.


Remortgage for an extension

A basic 4m x 5m single storey extension is unlikely to cost any less than £30,000 and a double storey extension with the same footprint could easily cost £50,000, so it is not surprising that many people choose / need to remortgage to fund the build of an extension.

The great news is that an addition or extension to your house is generally considered to be a permitted development, so you probably won’t need to get planning permission. It is, however, important to check that the extension you are planning meets the conditions before you start work and remember that most extensions require approval under the Building Regulations.

The importance of building within regulation and having appropriate sign-off becomes all the more apparent if/when you come to sell the property, as the buyers’ solicitor will dig into the work done and request the necessary paperwork.

Remortgage for house renovation

If your house needs significant repairs, it is possible to raise funds with a remortgage to renovate the property.

Property renovations are broadly split into two categories. The first is a property that is habitable but needs some modernisation and the second is where the property is not considered habitable by a mortgage lender.

The minimum requirement for a property to be considered habitable by a lender is generally a usable kitchen and bathroom and a watertight roof.

If you want to remortgage a house for renovation, your options will depend on whether or not the property is considered habitable and there are lenders that will consider both circumstances.

We work with specialist remortgage advisors who will be able to talk through the options for your renovation.

One thing to think about with a renovation remortgage is that, if the valuation identifies a serious problem like, for example, dodgy electrics, the lender may impose a retention. This means that, while it may agree to the mortgage, it will deduct the amount required to rectify the issue from the initial advance. Once you can prove that you have fixed the problem, the lender will advance the rest of the money.

Sometimes, the renovation of a property can take a number of months, or even years. If you come the end of a mortgage deal during this time, it is possible to remortgage during a renovation and again, your options will depend on whether or not the property is habitable.

If your improvements are successful in increasing the value of your property, you may choose to remortgage after the renovation as, if the loan is a smaller proportion of the property value, there could be more options for lower rates.

Remortgage for a loft conversion

A loft conversion is one of the most popular ways to add extra space to a home. A basic conversion can start at £15,000, but the average dormer loft conversion with a double bedroom and en suite costs between £35,000 and £45,000. Of course, you can spend what you want really, but it’s prudent to not blow a load of money on something you’re not likely to recoup in added value!

Many people choose to remortgage before starting a loft extension as this can provide them with the funds they need to complete the work, often at a lower rate of interest than other types of borrowing.

Research has found that a loft conversion could add up to 20% to the value of a home, so don’t just think about a remortgage to pay for a loft conversion, but also a remortgage after a loft conversion. If your house has increased in price by 20%, your mortgage will be a smaller proportion of its value and this could open up a range of lower mortgage rates.

Speak to one of the specialist remortgage advisors we work with to discuss whether you could lower your rate with a remortgage.

Things to think about

Whether you are remortgaging to fund an extension, loft conversion, or other home improvements, here are some of the things you need to think about.

Equity

One of the first things to think about if you want to remortgage to fund building work is the level of equity you have in your home. You can easily calculate this by subtracting the value of your mortgage balance from the value of your property.

Hypothetical Example

If your property is worth £300,000 and your current mortgage balance is £200,000, you have £100,000 of equity in your home. You might hear the term “Loan to value (LTV)”, this is the ratio of the loan compared to the value of the property, in this scenario 200k/300k = 66.6% LTV. Lenders use this LTV to determine risk, a higher LTV means less equity/security and this usually results in higher rates and more strict lending policy, when compared with lower LTVs.

“How much can I remortgage for an extension or home improvements?”

There are currently many mortgages that enable you to borrow up to 95% LTV, but it is worth noting that if you want a mortgage with a lower LTV you will have more options and will probably be able to secure a lower rate.

Hypothetical Example

In our example where your property is worth £300,000 and your current mortgage balance is £200,000 – if you were to remortgage to a deal up to 95% LTV, your new balance would be £285,000. This would provide you with £200,000 to repay your existing loan and leave you £85,000 to carry out your improvements.

Other circumstances, such as age, credit history and the purpose of the loan can impact the maximum LTV you are able to borrow, so it is always a good idea to speak to a specialist advisor who can talk through your options.

Affordability

If you want to remortgage for renovation or home improvements, you need to demonstrate that you can afford the repayments on the loan to the mortgage lender.

Lenders have different ways of working out how much you can borrow, and many will have affordability calculations that are based on both your income and how much you spend each month.

Generally speaking, a standard approach to how much you can borrow if you are remortgaging for an extension or improvements would be up to 3x or 4x your income. However, there are some lenders that can advance up to a maximum of 6x time income.

In addition to this, different lenders will consider additional sources of income, such as bonus, overtime or investment income, in very different ways. Some lenders will use 100% of additional income sources in their affordability calculations, but others may only take 50% or might not include them at all.

There are exceptions to this, and it’s sometimes possible to borrow well over 6x income with certain secured loan providers, who so long as they deem the monthly payments suitable, have no set limit to income multiples (some can go past 10x income!).

Hypothetical Example

Your basic salary is £25,000, but you earn an annual bonus of £15,000.  Here’s what different lenders might be able to lend to you:

  • Remortgage Lender 1 considers 50% of your bonus and lends up to 4x income

£15,000 x 50% = £7,500

£25,000 + £7,500 = £32,500

£32,500 x 4 = £130,000 max loan

  • Remortgage Lender 2 considers 100% of your bonus and lends up to 5x income

£15,000 x 100% = £15,000

£25,000 + £15,000 = £40,000

£40,000 x 5 = £200,000 max loan

  •  Secured loan lender considers 100% of your bonus and lends up to say, 8x income

£15,000 x 100% = £15,000
£25,000 + £15,000 = £40,000

£40,000 x 8 = £320,000 max loan

In this example, one lender may lend you up to £320,000 where another is only able to advance up to £130,000, because of the different ways they calculate your affordability.

More information on affordability can be found in the ‘How much can I borrow on a mortgage?’ section on our website.

How to remortgage for an extension or home improvements if you are self-employed

Can you remortgage to build an extension or make improvements to your home if you are self-employed?

Absolutely, there are lots of options for borrowers who work for themselves and it is now common for specialists to get mortgages approved based on just 1 years’ accounts. Some lenders can even consider less trading history if you are close to your year-end or were in the same line of work as an employee before you became self-employed.

How you draw an income from your business will influence the lender that best suits your circumstances. Many lenders calculate how much you can afford to borrow based on salary and dividends for company directors and some lenders can now also consider additional remuneration, such as private health insurance, directors car allowance and use of home as an office. There are also lenders that can use a retained net profit figure towards an affordability calculation, so this is an area where expert advice is vital as it could make a big difference to how much money you can raise with a remortgage for house extension or home improvements.

Hypothetical Example

You are the director of a Ltd company and a 50% shareholder of the business. The company makes an annual profit of £300,000 but you limit the salary and dividends you draw from the business to reduce your tax liability.

  • Salary: £12,000
  • Dividends: £40,000

A typical lender that considers salary and dividends and lends up to 5x income might be able to lend up to £260,000.

£12,000 + £40,000 = £52,000 x 5 = £260,000

On the other hand, a lender that considers profit retained within the business and lends up to 4x income could lend up to £600,000

£300,000 x 50% = £150,000 x4 = £600,000

More information is available in the Self Employed Mortgages section of our website.

Remortgaging for home extension or improvements if you are a contractor

There are lots of options for contract workers who want to remortgage for a loft conversion or other home improvements and this is another area where different lenders will have different requirements.

For example, some lenders can consider new contractors if they have previously been employed in the same industry in which they are contracting, while others will ask for a minimum trading period. Some lenders will require people working on fixed term contacts to have had their contract renewed at least once before, while others will look for a minimum time remaining on the current contract.

How much you are able to borrow as a contractor is generally based on the day rate you earn and lenders will often consider annual income to be weekly rate x 46 weeks to allow for holidays and breaks between contracts.

Hypothetical Example

  •  Day rate: £300
  • £300 x 5 days (1 week) = £1,500
  • £1,500 x 46 weeks = £69,000

There are also specialist options for workers who are paid through the Construction Industry Scheme (CIS) that use the gross income on a payslip rather than business accounts or self-assessment. More information can be found on the CIS section of our website.

The impact of loans and credit cards on how much you can borrow

If you have outstanding debt on unsecured credit, it may reduce the amount you are able to borrow on a remortgage for home improvements. When they calculate affordability, lenders will take into consideration your outgoings and credit commitments and so reducing the balance on any credit cards or loans could increase the amount you are able to raise on a remortgage. Here’s how it works:

Hypothetical Example

If you earn £30,000 a year and have monthly credit card and loan commitments of £300, a lender might subtract these commitments from your income when it calculates how much it is able to lend to you.

  • Annual credit commitments
  • £300 x 12 = £3,600

 

  • Income used by lender in affordability assessment
  • £30,000 - £3,600 =  £26,400

If the lender is able to lend up to 5x income, you could borrow £132,000

  • £26,400 x 5 = £132,000

However, if you were able to pay off the credit cards and loans and so did not have monthly credit commitments of £300, the same lender might be able to advance £150,000, which is £18,000 – nearly the cost of a loft conversion!

  • £30,000 x 5 = £150,000

Recently started a new job?

Just because you have recently started a new job, it doesn’t mean that you can’t remortgage for a house extension or home improvements.

Many lenders will consider applications from borrowers who are still in their probationary period and some will even consider a future contract within 3 months of the start date of a new job.

On the other hand, some lenders might ask for a minimum of 12 months’ employment history – so this is yet another area where criteria varies greatly depending on the choice of lender.

If you have recently started a new job, or you are changing job soon, and you want to remortgage for a loft conversion or other work on your property, speak to one of our specialist advisors, who can guide you through the available options.

Remortgaging for an extension or improvements on a Buy to Let property

It’s possible to remortgage a Buy to Let property to raise money for renovations, and the calculation for how much you are able to borrow will be based on a combination of the rental income the property can achieve and your circumstances.

Although affordability models can differ, for many lenders if you are a basic rate taxpayer, the rental income has to cover at least 125% of the mortgage, assuming the mortgage is charged at 5.5%. For higher rate taxpayers, this increases to 145% or 160%, to reflect the fact they will face bigger tax bills as a result of changes that are being introduced as a result of the PRA review on buy to let properties and landlord income tax changes.

Hypothetical Example

Buy to Let mortgage balance = £100,000

Interest calculated at 5.5%

Monthly interest payments = £458

This means the monthly rental income would need to be:

125% (basic rate taxpayer) £573
145% (higher rate taxpayer) £664
160% (top rate taxpayer) £733

If the rental income is not sufficient then the maximum loan available will reduce to fit. So, for instance, if the rental income above was £650pm, a higher rate tax payer would only be able to borrow up to a monthly interest payment of £406.25, = £88,500 max loan, whereas a basic rate tax payer could borrow with payments at £520pm = £113,500.

That said, there are a few lenders that allow landlords to borrow more than these calculations allow:

Top Slicing

This is where a landlord uses other earned personal income to top up shortfalls in BTL affordability. In relation to the above example, the higher rate taxpaying landlord who wanted to borrow £100k @ £458pm but could only borrow £88,500 could, in theory take the difference in income requirement on as a commitment against their personal earned income from their job. If this is deemed affordable by the lender then they would still advance the £100k as applied.

Landlords with multiple properties (Portfolio landlords)

If you own 4 or more rental properties with Buy to Let mortgages you are considered to be a portfolio landlord in the eyes of the regulator. This means that a lender will need to make some additional checks to understand your income and outgoings to ensure that your finances are not overstretched.

It is safe to say that, while there are many mortgage options for Buy to Let landlords, there is now a lot more to consider when you are choosing the right mortgage for your circumstances. We work with specialist Buy to Let advisors, who can guide you through the process and to choose the right option for your requirements.

Can I remortgage my house to build an extension or make home improvements if I have bad credit?

There are lots of mortgage options for people who have experienced credit problems and it is now possible to borrow up to 90% loan to value, or even more, with some lenders.

Your choice of mortgage will depend on the type of issues on your record and how long ago they happened.

Here’s information about typical types of credit problems and some of the things to think about:

Defaults & CCJs

A Default occurs when an account has had consecutive missed payments and a CCJ is a county court judgement, or court order, against someone who has failed to repay money.

There are lots of lenders that will consider borrowers with CCJs or Defaults, even where they have not been paid off, or satisfied. It is even possible to get a mortgage if you have had CCJs or Defaults registered to your name as recently as in the last 3-6 months.

Typically, your options will depend on how many defaults/CCJs there are, how much they are for and when they are registered.

Late payments and Arrears

There are also lots of options for borrowers with late payments or arrears on their record and an important consideration here is whether they are for missed payments on secured or unsecured debts.

An unsecured debt is one that is not secured on property, whereas a secured debt is secured on property and if you fail to make payments a lender could repossess the property to reclaim its money. Lenders will consider late payments and arrears to be less severe on unsecured debt than secured debt, but there are options for both.

Again, your options will depend on when the late payments or arrears were registered. There are plenty of options from specialist lenders for customers who have recent late payments on their credit record, but a high street lender might typically look for a clean record in the last 12 months.

IVAs and Bankruptcy

There are lenders that offer high LTV mortgages to borrowers who are in an IVA or have been discharged from bankruptcy just 1 year ago.

Debt Management Plans

If you are currently in a Debt Management Plan (DMP) to pay off debts and you have successfully maintained recent payments on the plan, there are lenders who will be able to lend to you.

Many lenders that specialise in providing mortgages to people with bad credit only distribute their products through mortgage advisors and so, by talking to an advisor, you will have access to more options than if you were to contact lenders directly.

We work with specialist advisors who have an in-depth knowledge of the criteria for different lenders and will be able to find the best deal for your circumstances.

Property types

The construction of your property is another factor that influences the best choice of mortgage for you. Most lenders will lend on properties built with standard construction methods, such as terraced/ semi / detached houses and purpose-built flats, but options might be more limited for studio flats, ex-council properties or flats in high-rise blocks or properties that are built from less standard materials, such as concrete or timber.

It is also possible to secure a mortgage on more unusual properties, such as a former windmill, eco-friendly home or a barn conversion. In these situations, lenders will want to see that the property would appeal to other buyers and would be easy to sell, if you were unable to maintain payments on the mortgage and it needed to be sold.

If you are renovating an unusual property, such as a barn conversion, it is important that you have the correct planning permission and other amenities. Get it right, and converting an old building, such as a barn, can be a great way to get the house you want at a price you can afford, and it is thought that the price of a barn is 40% higher after a conversion.

Mortgages are also available for semi-commercial properties. An example of a typical semi-commercial property is a shop on the ground floor with a flat above, and this can provide good opportunity for renovation or conversion. Semi-commercial mortgages are available from specialist lenders and we work with advisors who know the market and can guide you on the best options for your circumstances.

Read our article on non-standard construction property mortgages for more information.

Personal circumstances

Age

The minimum age for most lenders is 18 and there is an increasing number of options for older borrowers. For example, traditionally lenders have had a maximum age at application or at the end of the mortgage term, but there are now lenders that do not stipulate a maximum age. For these lenders, the important thing to think about is affordability and they will want to know that, if the mortgage stretches into your retirement, you will continue to be able to afford the repayments based on your retirement income.

Convictions

You do not have to disclose any information about previous cautions or convictions if they are spent under the Rehabilitation of Offenders Act 1974, but you may need to declare convictions that are unspent. We work with specialist advisors who will be able to talk through the options available to you.

Other factors

Early Repayment Charges

It is possible to remortgage to fund home improvements if you have Early Repayment Charges on your current mortgage, but it may be expensive. You need to decide whether you think it is worth paying the charges or waiting until they no longer apply to your mortgage. We work with mortgage advisors who will be able to talk you through the considerations to help you make the best decision.

Remortgage to build a house

If you have enough equity in your home you may be able to remortgage to build a new house. If you cannot raise enough money on your existing property to pay to build a new house outright, you could use it as a deposit and get a loan to help to you with the build costs. The type of loan you need will depend on whether you are building a single property or starting a more commercial development and these types of project would generally need a deposit of about 15% or 20%.

Self-build mortgages are specialist mortgages that are tailored to help you pay to build a new home. The funding is released in stages throughout the construction, to fund different parts of the build, rather than all at once on completion. Self-build is becoming more popular and there is an increasing number of lenders that offer self-build mortgages, but they are specialist products with many considerations, and so it is worth speaking to a specialist advisor who knows and understands the market.

If you want to raise money for a more commercial development, such as converting an office building into a block of flats or constructing a number of houses, you might need to fund this using development finance. This is another specialist area, but it is also a competitive market and there are lots of lenders in this sector that want to lend. Development finance is typically available for loans of £1 million or more, but there are options if you want to borrow less than £1 million and we work with advisors who will be able to talk you through the options.

A popular use of development finance is converting a large house or office building into a block of self-contained flats and then selling on those flats or renting them out. If this is something that you are thinking of, you should think about your options for splitting the title. As a single building, the property you are converting would have had one title and by splitting it into different residences you might consider carrying out the legal work to create multiple titles. Splitting the title on a property can provide opportunity for investors to realise greater capital gains as they can increase the value of each unit by separating the title and selling them off individually.

If you are looking to remortgage your home to carry out renovations or build an extension, send us an enquiry using the form below and one of the remortgage specialists will contact you ASAP.

If you need immediate assistance, get in touch now.


Updated: 12th July 2018
OnlineMortgageAdvisor 2018 ©

FCA disclaimer

The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage.

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