Remortgaging to Fund Home Improvements
Looking for ways to fund your extension or home improvements? Considering remortgaging after renovating your home?
Find out your best option in our guide!
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Author: Pete Mugleston - Mortgage Expert, MD
Updated: February 18, 2022
Home improvements, such as a new kitchen, loft conversion, or extension, can be a great way to add value to a property while enhancing your enjoyment of living in it. But, first, you’ll need to raise the money to pay for the work.
Most people do this either with a home improvement loan or, particularly for bigger projects, by remortgaging.
This guide includes all the information you need to help you decide which method is right for you, including how to do it, the eligibility criteria and much more.
The following topics are covered below...
Options for funding home improvements
There’s more than one way to raise funds for home improvements, such as an extension or renovation work.
Here are the most common financing options that homeowners turn to…
- Taking out a second mortgage: You can apply for a second charge mortgage (a loan secured on your home) that you’ll pay off monthly in addition to your current mortgage.
- Increasing your existing mortgage: If you’re happy with your current lender and rate, you can apply to increase the amount you borrow from them.
- Remortgaging: You can switch your mortgage to a new lender and increase your borrowing at the same time. That’s the option we’ll be focusing on in this article.
Potential alternatives to consider
If you don’t wish to alter your current mortgage or borrow more against your property, there are other options to consider, and they include…
- Bridging loans: These are short-term, interest-only loans that you could use to secure quick finance for home improvements. You will need an exit strategy for this type of finance, and this would usually be remortgaging the property to borrow against its increased value or selling the property after it has been renovated.
- Using a credit card: For minor improvements, you can get a credit card with a reduced introductory interest rate and pay it off as soon as possible.
- Getting a bank loan: Depending on your credit rating, you might be able to get an unsecured home improvement loan and pay it off in monthly installments.
If you’re unsure whether to go down the remortgage route or choose one of the alternatives, keep in mind that there are brokers who specialise in arranging home improvement finance, and they can offer impartial advice about the best option for you.
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How to remortgage for an extension or home improvements
The process of remortgaging to fund home improvements is slightly different to remortgaging for another reason. You’ll stand the best chance of first-time success if you follow these steps.
Step one: calculate your current loan-to-value
Your ‘loan-to-value’ (LTV) is the total amount you owe on your mortgage, expressed as a percentage of the total property value.
For example, if you have a mortgage of £180,000 and your home is worth £200,000, your LTV is 90%. If you have a mortgage of £100,000 and your home is worth £200,000, your LTV is 50%.
To calculate yours:
- Find out how much you owe on your mortgage by asking your lender
- Find out your property value by asking an estate agent or surveyor
- Divide the first figure by the second and multiply by 100 to calculate your LTV as a percentage.
Step two: Estimate the cost of your home improvements
Your cost estimate will dictate how much you need to borrow. You can either ask your contractor to provide an estimate or, if you’re undertaking work yourself, create your own based on the various costs of materials and labour.
Your lender may want to see a detailed breakdown.
If you add together the amount you currently owe on your mortgage and the amount you need to borrow, you can calculate the LTV you need.
As before, divide this figure by the property value and multiply by 100.
Here’s an example:
- Let’s say your home is worth £200,000
- You have a mortgage for £100,000
- You’re planning an extension that will cost £30,000
- Add together £100,000 and £30,000, then divide by £200,000 and multiply by 100
- Your LTV will be 65%.
Step three: Find a broker who specialises in home improvement finance
While it’s not essential to work with a broker, it’s recommended in these cases. That’s because every home improvement project is different, and every lender has specific rules relating to which remortgage applications they’ll approve.
Finding the right lender for your specific circumstances takes skill and experience.
As well as understanding and explaining the eligibility criteria of each lender, a broker can help you in various other ways:
- Finding deals that aren’t advertised to the public, which you wouldn’t otherwise have access to
- Comparing all the available deals to ensure that you’re getting the best value
- Negotiating directly with the lender if your situation is complex
- Checking the terms of your mortgage to make sure it meets your needs
- Advising you if you’d be better off sticking with your current lender than remortgaging with a new lender
- Checking your paperwork so that your application is more likely to be approved first-time.
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Why remortgage for this purpose?
To help you decide whether to remortgage or explore other options, we’ve outlined the benefits of refinances for this purpose and weighted them up against the drawbacks…
There are several reasons why you might choose to remortgage instead of getting a home improvement loan (or one of the other options).
- It’s a great opportunity to shop around for the best mortgage rate. You could save money by finding a deal that’s better than your current mortgage.
- You can spread the cost over a longer period and pay back less each month. Most home improvement loans are repaid over a maximum of five years, while most mortgages are repaid over 25 years.
- Your interest rate will likely be lower. Mortgage rates are typically below the interest rates for home improvement loans and credit cards.
- You might find it more convenient. A mortgage is only one monthly repayment to worry about, rather than two.
On the other hand, remortgaging has several disadvantages compared to the other options.
- You may pay more interest in total. While your rate might be lower than with a loan, the longer borrowing period means that the total amount of interest is often higher.
- You may need to pay an exit fee on your current mortgage. Many lenders will charge you between 1-5% of your outstanding balance to pay off the loan early. You might also pay an arrangement fee for your new mortgage.
- Finding the best mortgage deal and completing the paperwork can be difficult and time-consuming if you don’t have expert help.
- You may not always be eligible to remortgage. We’ll look at the eligibility requirements a little later.
How much can you remortgage for an extension?
As well as the usual mortgage eligibility criteria, there are some specific requirements that will determine exactly how much more you’re able to borrow when remortgaging for any type of home improvements.
These vary between lenders, but here is an overview:
Most lenders have a maximum LTV of 85% or 90%. So, if you already have an 85% or 90% LTV mortgage, it can be difficult to remortgage for more.
There are exceptions, though. At the time of writing there are around seven lenders, including Accord Mortgages and Melton Building Society, who offer a maximum LTV of 95% to make home improvements.
Lenders will look at both your income and spending to confirm how much you can borrow. Most will lend up to a maximum of four times your annual income, though some can offer up to five times.
When you’re applying to remortgage specifically for home improvements, some lenders have stricter affordability criteria. For example, Atom Bank will only lend up to 80% of the amount they might otherwise approve.
As part of your application, some lenders will ask to see detailed cost estimates for the home improvement works that are taking place.
They may also ask to see evidence of planning permission, if it’s required for your project.
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Remortgaging after home improvements
Another option to consider is to remortgage after you’ve completed your extension or home improvements (though you’d need to fund the improvements through a different financing method, such as a bridging loan). If you’ve added significant value to the property, you could bring down your LTV and get access to more deals.
For example, let’s say your home was worth £200,000 and you had a mortgage for £180,000. After completing major home improvements, your home could be valued at £225,000.
This would take your LTV from 90% to 80%. At your new, lower LTV, a broker could help you to get a better mortgage rate.
Get matched with a remortgage specialist today
Whether you’re remortgaging before or after home improvements, it’s sensible to work with a broker who specialises in cases like yours. They’ll know who to approach for the best deals and which lenders are most likely to approve your application.
Through our free broker-matching service, we can introduce you to an expert in remortgaging for home improvements for a no-obligation chat.
Just call 0808 189 0463 or contact us online to get started.
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Mortgage Expert, MD
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!