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Remortgaging for Home Improvements

No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 26, 2021

By remortgaging your home, you can release any available equity in your property to put towards your desired home improvements. Any equity you have is the difference between your property’s value and the remaining mortgage, so how much you can take out will depend on how much money you’ve ‘freed up’ in your home.

In this article, we discuss how to remortgage for home improvements as well as the alternatives, and tackle the main factors and considerations. Moreover, we’ve fielded the questions we hear most often on this topic in our FAQ section.

Remortgaging to pay for home improvements and extensions

As long as you have equity in your home and can afford the repayments, it is possible to remortgage for home improvements and extensions.

Your options

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 more substantial 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.

Extensions

Extending your property can be a great way to save money on the cost of moving house, but can also significantly increase the value of your property. So it’s no surprise extending what you currently have is becoming more and more popular.

A basic 4m x 5m single-storey extension is likely to cost no less than £25,000 and a double-storey extension with the same footprint could cost £50,000, so it is common for people choose to remortgage to fund the build of an extension.

The other great news is that addition or extension to your house is generally considered to be 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.

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.

If you want some guidance on how to find the best deal for your extensions remortgage, we’ll introduce you to an expert home improvement remortgage broker who specialises in cases just like yours. We won’t charge a fee and there’s no obligation to act on the advice you’re given. Call us today on 0808 189 2301 or make an enquiry.

Home 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:

  1. The property is habitable but needs some modernisation
  2. 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.

We work with specialist remortgage advisors who will be able to talk through the options for your renovation. Contact us today if you’d like us to match you up with a remortgages broker with the right experience to advise on how to finance your project.

One possibility to be aware of is that the valuation may identify a serious problem, for example, electrics that don’t comply with current regulations. In this case the lender may impose retention, which means that 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 to 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.

Loft conversions

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. How much you spend is, of course, your decision, but it’s prudent to think carefully about what will add value within a reasonable budget.

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.

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Should you get a home improvement loan or remortgage?

It depends on your own 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?

You could also look into taking out a second charge mortgage (also called a ‘secured loan’) or unsecured loan:

Type of loan How it works
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.

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Remortgage considerations

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.

How much equity you have

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.

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.

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.

If you own 100% of your property, it could be possible to borrow against its value to fund renovation work. This is often called an unencumbered mortgage.

Meanwhile, factors, 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 refer to this as ‘affordability’.

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 a 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 in the right circumstances!).

Hypothetical Example

Suppose your basic salary is £25,000, but you earn an annual bonus of £15,000. This table shows that maximum loan size that different lenders might be able to lend to you:

Income Multiple Remortgage Lender 1: salary + 50% bonus Remortgage Lender 2: salary + 100% bonus
3 x total income £97,500 £120,000
4 x total income £130,000 £160,000
5 x total income £162,000 £200,000

Suppose you decide instead to take a secured loan, which offers a higher multiple of your total income. Secured loan lender 1 considers 50% of your bonus, while lender 2 counts 100% of your bonus.

In this example, on exactly the same income, one lender may lend you up to £200,000 where another is only able to advance up to £97,500, because of the different ways they calculate your affordability. But don’t forget there are different risks associated with secured loans vs remortgages.

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

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Are you self-employed?

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 page.

Are you a contractor?

Some lenders can consider new contractors for a mortgage if they have previously been employed in the same industry, while others will ask for a minimum trading period. Some lenders will require people working on fixed term contracts 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 is generally based on the day rate you earn and lenders will often consider annual income to be your weekly rate x 46 weeks to allow for holidays and breaks between contracts.

Hypothetical example

Daily Rate Weekly Rate Annual Rate
£150 £750 £34,500
£300 £1,500 £69,000
£500 £2,500 £115,000

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 in our guide to CIS mortgages.

Remortgaging if you have bad credit

There are lots of remortgage options for people who want to unlock equity for home improvements but have experienced credit problems. It is now possible to borrow up to 90% loan to value, or even more, with some bad credit mortgage lenders.

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

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.

What factors might impact your plans?

There are a number of external variables that might affect your home renovation plans if you’re planning to bankroll them through a remortgage. We’ve outlined the main ones below…

Property types

The construction of your property is another factor that influences the best choice of remortgage for you. Most lenders will lend on properties built with standard construction methods, 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.

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

Age

The minimum age for most lenders is 18 and there is an increasing number of options for older borrowers. For example, traditional 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.

Criminal 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.

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.

Call us today on 0808 189 2301 or make an enquiry and we’ll introduce you to a remortgage broker who specialises in cases just like yours. We won’t charge a fee and there’s no obligation to act on the advice you’re given.

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FAQs

Can I remortgage if I’ve recently started a new job?

Yes. Some 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.

Can I remortgage to fund renovations for my buy-to-let property?

Yes. 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 pay tax at the basic (20%) rate , 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%.

Can I remortgage to build a house?

Potentially. 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 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 projects would generally need a deposit of about 15% or 20%.

If you want to raise money for a 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.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information 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.

Some types of buy to let mortgages are not regulated by the FCA. 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. Equity released from your home will also be secured against it.

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