What’s the best way to borrow money so I can extend my home?

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Dear Gareth,

I just bought a property with a 10 percent down payment. I want to add an extension to add space and value to the property. How would I get this out of the equity I have on the property? Could I borrow an additional 5 percent? Or should I wait until I own more of the property before I can borrow against it?

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Gareth says …

It is common for people to tap into the money they have amassed on their property to pay for renovations, but this is not the only way. Remember that a mortgage is a decades-long debt and that any additional borrowing you take out will stay with you for the life of your loan. What may seem like the most obvious place to fund your project may end up being the most expensive.

“A few things to consider”

Let’s examine a little more closely what you propose. Since you have just bought the property, you will want to increase your mortgage. Doing this with your existing lender is often referred to as “further advancement”. This means that over the life of your mortgage business you will borrow more money from your existing lender.

The interest rate depends on what your lender is offering – sometimes it can be the same as your existing mortgage rate, but you may be charged a higher loan-to-value ratio (LTV), making it more expensive than your existing mortgage.

The advantages of this are that you don’t have to switch providers to get a loan, you can spread your repayments over a very long period of time, and even if the interest rate is higher than your mortgage, it is probably cheaper than you would get one Pay unsecured loan.

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There are a few things to consider – the most important one is whether your lender would actually give you an advance.

Lending to people with a 10 percent deposit is on the riskier end for mortgage lenders, but borrowing another 5 percent of the value of your property would get them to the maximum a bank or building society is willing to lend.

She may not be willing to take that extra risk – some banks won’t consider an additional advance payment until you have at least 20 percent equity in your property. Some lenders offer a separate loan to run alongside your mortgage. It is worth understanding the terms before submitting an application.

You also need to consider affordability – can you afford the monthly mortgage payments increase? And if you tie the borrowing to your property, failing to make repayments in trouble can result in repossession of your home.

After you have just bought your property, if you were to reschedule with another lender you would incur early repayment fees before your term expires, which would make the borrowing costs very expensive.

Early repayment fees are typically around 2 percent of the value of your loan, so you will have to raise thousands of pounds to borrow more.

I think your suggestion of waiting until you have built up more equity is the most sensible way to go. If your current mortgage business runs out, you can reschedule to free up cash from your property.

Hopefully, as the value of your property has increased, the combination of any principal repayments you made during the transaction will bring you to a lower LTV – say 15 or 20 percent.

Then you can reschedule up to 90 percent of the LTV, with 85 percent covering your existing loan and another 5 percent financing your renovation work. I would suggest seeking independent mortgage advice to find a bank willing to provide you with credit on these terms.

There is some risk here. Interest rates are at record lows. The guaranteed interest won’t be that low in two years – and in the end you can expect higher monthly repayments.

To put yourself in the best possible position, consider overpaying your mortgage. This allows you to buy up more equity in the property so that you can do this at a much more attractive mortgage lending value in the event of a debt rescheduling.

Which? has published a calculator – visit which.co.uk/overpayment


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