From loft conversions to rear extensions, growing numbers of homeowners are extending their homes to create extra space rather than moving to a bigger property. But what are your options for financing the building work?

Re-mortgage

For major structural projects, you may want to consider extending your existing mortgage or re-mortgage. Under this option, you take out a new mortgage which pays off your original home loan and leaves sufficient funds to finance your extension. The loan is paid back over the life of the mortgage which means the increase in monthly payments may not be too big.

The new mortgage could be with either your existing lender or you might get a better deal elsewhere. Finding funds to pay for your home extension can be an opportunity to cut costs, says Simon Upton, director of Lymington-based Independent Mortgage Solutions. “Homeowners could be pleasantly surprised at how low interest rates are now if they haven’t renewed their mortgage for a number of years or reverted to the variable rate.”

If you get a lower interest rate, you could potentially end up paying smaller monthly repayments than under your initial mortgage. “It all depends on loan to value ratio and individual circumstances but there are half a dozen lenders offering five-year fixed rate mortgages for under two per cent,” said Mr Upton. But this option is only cost-effective if you save more than you might have to pay out in expensive early repayment charges for leaving your lender or fixed-term mortgage and application fees.  Remember you’ll still have to go through strict affordability checks looking at income and outgoings to quality for a new mortgage.

Further advance from your current lender

If your home has increased in value since you purchased it, you could borrow a further advance from your existing lender.  It means a second loan will run alongside your current mortgage. Be prepared to pay a higher rate of interest than your existing mortgage, especially if you were on a low-cost deal such as lifetime tracker.  Some lenders have specific rates for further advances. This option can make sense if you don’t want to re-mortgage or switch lenders to avoid early repayment penalties. The interest rate should be lower than a personal loan and you can spread payment over a longer term. But check the market to see if you can get a better deal elsewhere.

Before committing yourself, make sure you can afford the additional monthly payments. To be eligible, you will need a good credit record and the value of your home will need to have increased beyond the mortgage amount you borrowed. 

Second charge mortgage

If you have a sizeable amount of equity in your home, then a second charge mortgage is a possible option.  This is a secured loan with the lender using your home for security.  The loan will be paid off alongside your existing mortgage and is often called a second mortgage.

Unlike a typical mortgage, where the loan is based on your deposit, ability to afford monthly payments and credit rating, a second mortgage is based on the available equity in your property. This is the percentage of the home owned outright by you. For example, if you bought a home for £300,000 and have £250,000 left to pay on the mortgage than you have £50,000 equity. The equity can also increase with a property’s value. So, you could get a loan up to £50,000 depending on your credit rating and ability to pay both mortgages.

“If you have equity in your property you can raise capital by either a further advance from your current lender or a secure loan from a separate lender,” said Mr Upton. With a second mortgage you continue paying your first one, so avoid early repayment charges. However, your loan will likely have a higher interest rate than your mortgage deal.

A whole host of lenders provide second charge loans, so it pays to compare costs. Remember, a second mortgage is secured against your home, so if you fail to keep up with your payments your home could be repossessed.

Unsecured or personal loans

If you are unable to re-mortgage or take a further advance or a second charge mortgage, then an unsecured personal loan may be a way to finance your home extension. While in some cases the loan won’t be as cheap as getting a further advance, it’s less risky as it won’t be secured against your home.   If you need to borrow no more than £25,000, this could be the best option, says Mr Upton. “If it’s a small sum, the fees associated with a secured loan might wipe out the advantage of lower interest rates, so a personal loan may be the best way forward.”  Unlike mortgages, usually there will be no arrangement or set-up fee. Try out the calculators on loan company websites to see if this option would work for you. 

For example, someone who borrowed £25,000 via a Post Office loan over five years would have to repay £450.33 a month assuming they were eligible for its 3 per cent APR rate. Figures correct in July 2018.

Credit Cards

Credit cards should only be used for small costs that can be paid off in a month or two. Some credit cards will allow you to avoid paying interest for 18 months or longer. But credit card financing is one of the most expensive ways to finance your project in the longer term. Interest rates are much higher than secured or personal loans that you might get from a bank or building society.  “It is dangerous. I would not recommend credit cards as a way of funding an extension,” said Mr Upton.

Savings

By far the best way of financing your extension is saving up.  Unfortunately, we don’t all have the willpower or means to save large sums – and still pay the bills. Sometimes the extension may need to be done urgently, for example if more space is needed for a growing family or an elderly parent is moving in. In these situations, borrowing for improvements to a property may be a more realistic option but don’t over-stretch yourself.

Consult a mortgage advisor

Consult an independent mortgage advisor who will take into account your individual circumstances to help you decide which is the best option for your home extension.