How to fund an extension
There are lots of different ways that you can look to fund a home improvement or extension. Depending on your financial situation and the type of extension you want to build. You might find that some options are better for you than others. Here, we’ll look at different types of funding for major home renovations and extensions.
Use savings
If you have the money in savings, it might be worth looking at this as an option for funding your renovations. The important thing to consider is whether or not using your savings will negatively impact your overall financial situation. For example, you might want to make sure that you still have a suitable emergency fund available even after using your savings. It is also important to look at the interest rates on your savings. While loan interest rates are often higher than the interest rates on savings, it might be that it’s better to take out financing for an extension.
Can you increase your mortgage for an extension?
Yes, some lenders will let you borrow additional money to fund an extension or other large home renovations through a further advance. This can mean adding more money to your current mortgage loan. This can help you keep your finances simple, but it means you will be paying off your mortgage loan over a longer period to cover the additional amount. Increasing your mortgage means you can stay with your current lender on your current deal, plus it can help you avoid any early repayment charges.
Remortgage your home
A remortgage is a bit more complicated than a further advance. This is where you transfer your current mortgage product to a new one (it can be with the same lender or a new one) and in the case of wanting to fund a home extension means borrowing more money. Depending on how much you want to borrow it might change the product or rate of interest you pay. You should also be aware that most lenders have early repayment charges, so unless you have come to the end of your initial product be prepared to pay a fee.
As you are taking out a new product you will be subject to the lenders underwriting processes and checks and if you are looking to borrow more money then will be subject to their affordability testing.
Pay on a credit card
If you are looking for funds for a relatively small extension, you might prefer to take the amount out on a credit card. If you want to use a credit card, it’s a good idea to find a 0% interest rate or another good introductory rate, otherwise, you might face very high rates and could end up paying a lot of interest over the course of your repayments.
Paying with a credit card does have the benefit of added consumer protection. This means that if a contractor takes payment but doesn’t complete the work, you should be able to get your money back. However, it’s always worth being careful with which contractors you use, by getting reviews and recommendations before paying anyone for the job.
If you’re looking at using a credit card for home renovations, keep an eye out for hidden fees or unexpected charges. You should always have a plan for how you will pay back the amount you borrow.
Explore a range of options for a second mortgage
Instead of remortgaging, you could look at getting a second charge mortgage. This is where you take out an additional mortgage, based on the amount of equity that you have in your home (that is, the amount of the property that you own outright). Getting a second mortgage means you must pay back both mortgages at once. This means you will need to consider your monthly repayments to work out how much you can afford. Since a second mortgage is secured against your property, you will often find that you can get better interest rates compared to credit cards or personal loans. Second mortgages can have higher borrowing limits compared to unsecured loans, giving you the funds needed for large renovations such as two-storey extensions or adding a ‘granny flat’. However, you should bear in mind that any loan secured against your home (like your mortgage) means your home could be at risk if you miss some payments. Luckily, this is a last resort for lenders, and they will always work with their customers if they find themselves in financial difficulty.
Take out an unsecured personal loan
You could also look at taking out an unsecured personal loan, which means that the loan is not secured against your property. This can give some borrowers the peace of mind that their property is not at risk, but it also comes with downsides. Personal loans often have higher interest rates compared to second mortgages, and there can be a lower limit on how much you can borrow and over what period, typically up to 7 years. If you want to ensure you get the best rates possible for a personal loan, you should look at ways to improve your credit score and increase your income compared to your debts.
What to consider before building an extension
Before you start planning how to fund your extension, there are several factors to consider. First and foremost, you need to decide what you want it to achieve. Are you adding an extra bedroom or a larger living room? Do you want to create an open-plan kitchen/dining area? Understanding your goals will help you plan and budget accordingly.
You also need to think about the impact of the extension on your existing property. Will it affect the natural light or block any views? And how will it affect the energy efficiency of your home? These are all important considerations to make.
Finally, you should consider the overall cost of the project. Extensions tend to be more expensive than other home renovations, so it’s essential you have a realistic budget in place before you start and stick to it. This will help you avoid overspending and ensure that you can finance the project without becoming overstretched.
Do you need permission for an extension?
In most cases, you will need planning permission for a house extension. The rules and regulations vary depending on the size and location of the extension, so you should check with your local planning authority or council before starting any work.
In some cases, you may be able to build under permitted development rights, which means that you can carry out certain types of development without the need for planning permission. However, there are restrictions on the size and location of the extension.
How much value does an extension add to your home?
Adding an extension to your home can significantly increase its value. According to research, a well-designed and executed extension can add up to 20% to the value of your property.
However, the value added will depend on several factors, such as the build quality, the location of the property, and the size of the extension. If in doubt, speak to a local estate agent to get a good idea of the potential value that an extension could add to your property.
How to decide which financing option is best for your specific needs
When deciding which financing option is best for your specific needs, there are several factors to consider. These include:
Your budget: How much money do you need to borrow, and can you afford the repayments?
Your credit score: A good credit score can help you get better interest rates and more favourable terms.
Your equity: The amount of equity you have in your home will determine how much you can borrow via a remortgage, further advance or Second charge.
The length of the loan: How long do you need to repay the loan, and what are the repayment terms?
Early repayment charges: If you are looking at remortgaging, this means paying off your current mortgage with the new loan. If you have early repayment charges on your current mortgage, you might face a fee for remortgaging.
Your affordability: Most loan applications will be assessed on how much you can afford to repay each month, based on your salary and your outgoings, such as debts. If your affordability is not high enough, you might want to look at reducing your debts before looking to build an extension.
Security: It is important to consider whether you are comfortable with having your property act as security for the loan that you take out.
Be sure to talk to a personal financial advisor to get an idea of what financing might be best for you.
A challenge worth investing in
Financing a house extension can be challenging but there are several options available to help you fund your project. Secured homeowner loans are a popular option, but it’s important to consider all available options and speak to a financial advisor or a mortgage broker before making a final decision.
With the right financing in place, you can manifest the home of your dreams and add significant value to your property. Just remember to ask questions at every stage of the process and always research before pulling the trigger.
If you want to learn more about homeowner loans speak with one of our trusted broker partners.