For anyone wanting to know, ‘how does remortgaging for home improvements work?’, then this article is for you.
Most homeowners will at some point want to carry out home improvements and consider how they can pay for them.
The basic aim for remortgaging is to make improvements to a property that will boost its value.
But is it a good idea for homeowners to remortgage their property for improvements when not every undertaking will add value?
How does remortgaging work for home improvements?
It’s important to appreciate that every mortgage application made to a lender will be based on the applicant’s circumstances.
This is when a lender will determine whether a remortgage for your planned home improvements will be feasible.
And one of the reasons that many homeowners will apply for a remortgage for undertaking improvements is that by doing so there’s less hassle and expense than having to move home.
Among the most popular improvement works is to add an extra bedroom so it makes sense to add an extension for the extra space without having to move to a new property that has the additional bedroom.
What will be considered for a remortgaging application?
Along with an extension, homeowners may be looking to remortgage their property to pay for a loft conversion or renovations.
Indeed, the list of potential improvements is a long one and you need to decide what you want to get from the remortgage.
As usual, a mortgage lender will consider a number of issues for any remortgaging application, including:
- The home improvement costs;
- Equity (that’s the profit in the house);
- Your type of property;
- Your financial circumstances;
- Your credit history.
Essentially, the lender will be looking at your remortgaging application as a new mortgage and undertaking the tests and checks that they did in the first place.
The big issue for remortgaging is proving to a lender that you can afford their repayments.
This means the lender will be looking at every aspect of your financial position – not just currently, but in the past also.
They will also calculate your income and expenditure and take into account other debts.
This means that the amount that you are able to borrow is reliant on the lender’s criteria.
It doesn’t matter how much value the improvement work will bring to a property, if the lender decides you can’t afford the new mortgage, then you won’t get the loan.
This may then mean you will need to shop around because there are some lenders who will lend more based on your basic salary, while others will add in overtime and bonuses.
Home improvement costs
As part of their lending criteria, a mortgage lender will look at how much the home improvements will cost to see how much you will need when remortgaging.
When it comes to home improvements, there’s a lot to consider when arriving at the final amount including:
- Planning permission costs;
- Builder’s costs;
- A buffer amount for unexpected costs.
Should the lender decide they will offer a remortgage, then it needs to work for you and be cost-effective.
As an example, you may live in a house worth £300,000 that has an outstanding mortgage of £150,000.
You have calculated that an extension will cost £25,000 and with a remortgage, you could sign up for a deal of £175,000.
This will then pay off the current mortgage and you have £25,000 to pay for the extension to your home.
Your credit history
The most important element for any mortgage lender when considering a loan application is your ability to meet the repayments.
For applicants with a poor financial history, you need to find specialist lenders who will deal specifically in those mortgages aimed at applicants with an adverse credit rating.
The type and age of any credit problems will also have a bearing on the interest rates being levied.
The lender will also take into account outstanding loans and credit cards.
This is all part of the affordability process because the lender needs to check thoroughly your outgoings.
With rising house prices, you will be generating equity or profit in your home.
So, the longer you live in a property, the more it will be worth so the more equity you will have.
This is an important element when it comes to remortgaging because you will not be remortgaging for the property’s full value.
You should never lose sight of the fact that you can only borrow against your home’s current value.
So, the type of work you are considering is not really important, but the cost is.
If there is a lot of equity, then this offers a safe investment for the lender.
For example, if your home is worth £250,000, and your current mortgage is £150,000 and you want £40,000 for improvement work, means your new loan will be £190,000.
Because of the equity in the property, it’s likely a lender will be enthusiastic about this prospect.
However, using these figures but changing the home’s value to £200,000 will mean that there’s only £50,000 of equity and you are asking for £40,000 for home improvement works. This is not quite as attractive as an investment for the lender.
Even if the work will add £50,000 to your home’s value, a lender will be looking very carefully at the figures.
The lender will take into account your personal circumstances which include your financial situation and age.
The minimum age for most lenders will be 18 but you will find that lots of lenders will not have a maximum age for lending.
Again, regardless of your circumstances, the lender is looking at your ability at meeting repayments.
Remortgaging costs for home improvements
There is a range of home improvements that lenders will welcome an application for.
However, it’s worth considering how much these home improvement works will amount to.
Depending on the size of your property, a standard extension can cost anything upwards from £25,000. It’s not an unreasonable request to remortgage for the entire amount plus the outstanding mortgage amount. However, check with the local authority whether you need planning permission before work begins.
A loft conversion is a popular and fairly easy way to add an extra bedroom to a home.
A converted loft can also be turned into an office and costs can start from £15,000.
Also, a loft conversion is likely to boost the property’s value so if you can afford to pay for the loft conversion it’s worth considering this route and then remortgaging once the work is complete to enjoy lower rates because your property is worth more.
If your home needs lots of repairs, then you can access remortgage deals. You need to calculate how much work is necessary and the costs that will bring the property up to a standard that will meet the lender’s criteria.
To even be considered for a mortgage, a property must have a functioning bathroom and kitchen, plus the roof must be secure and sealed. Or you may just be wanting to modernise your property, but you need to ensure that the cost of the work is accurate when making an application. Indeed, do not be surprised if the lender asks for a retainer to cover issues such as plumbing or electrics and this retainer will then pay for the issue to be fixed.
Remortgaging before or after home improvements?
We have mentioned already the issue of paying for home improvements and then applying for a remortgage.
So, if you are asking, ‘Should I remortgage after making the home improvement or before?’, the answer needs careful consideration.
You should really discuss the issue with a financial adviser because if you can pay for the work to be undertaken you will then increase the property’s value.
You will then enjoy lower interest rates because you are effectively applying for a lower amount based on the property’s value.
Alternatives to remortgaging to pay for home improvements
Alongside the prospect of remortgaging, homeowners could also use their home as an asset for a secured loan.
This tends to be a riskier option and you need to meet the repayments or face losing your home.
This last point is very important and while you may want to undertake home improvements, the higher risk of losing your home should be considered very carefully.
Again, affordability will be taken into account by the lender.
Alongside a secured loan, you could also consider a second charge mortgage for home improvements.
The difference between a standard mortgage and a second charge mortgage is that this will be a second loan secured on your property, effectively using the equity you have built up for a separate loan.
That’s different to a standard mortgage used to buy a property and will be based on your credit rating plus your income and affordability, plus the deposit you have raised.
Again, you will need to prove that you can repay the second charge mortgage to a lender.
Can I afford a home improvement remortgage?
From the outset, you should work out how much the home improvements will cost and what the likely value of the new mortgage will be before deciding whether you can afford the repayments.
The mortgage lender will do most of this work for you, but you need to be aware that they will need to be reassured that the repayments are affordable.
The criteria for remortgaging will vary between lenders, some will allow three times your income, others will allow four times and some even more.
You should discuss your options with a financial adviser and see what offers your mortgage lender currently has.
Is remortgaging for home improvements worth it?
While the process of seeking a remortgage for home improvement is an emotional journey, you still need to consider lots of issues – and decide whether remortgaging for home improvements is actually worth it.
Firstly, while adding space will boost the property’s value, the works carried out should not lower the house price.
This means that when the work is complete, the equity that you have borrowed against should be easier to recover and the increasing value of your home will effectively mean that the home improvement work has paid for itself.
Is home improvement work cost-effective?
Having mentioned that the home improvement work for a remortgage should boost your home’s value, not everything you undertake will boost its worth.
Regardless of the home improvement costs, here’s a breakdown from Towergate Insurance of what home improvement work could potentially add to an average value home:
- Garage – £26,012;
- Energy Saving – £18,303;
- Loft conversion – £13,596;
- Open Plan Living – £10,338;
- Central Heating – £7,970;
- Add a bathroom – £6,115;
- New kitchen – £4,438;
- Conservatory – £3,365;
- Single Storey Extension – £2,804;
- Flooring – £2,219.
Some of those are quite impressive figures for what could be a nominal investment. But not every investment will pay off – and some, according to Ideal Home, are surprisingly risky:
- Double glazing;
- Solar panels;
- Combining bedrooms;
- Garage converted to room.
There will be homeowners who are considering improvements and looking at those figures and wondering whether the work they want will really pay off.
If you need the extra space and you like where you live, then the work will be worthwhile.
However, there are some startling losses to consider that haven’t been mentioned above and if you add a swimming pool to your property, the value will fall by £33,000, add a tennis court and you take another £33,000 hit.
If you add a home cinema, your home’s value will drop by £25,000 and if you add a wine cellar then you’ll be hit by a corking £46,000 loss.
Essentially, most home improvement works will be welcomed by a mortgage lender, but you need to consider carefully whether the costs involved will mean an improvement to your living space and whether your home’s value is adversely affected. And don’t forget that no matter how great the improvement will be – if mortgage lenders don’t agree then you will have to fund the work yourself.