Against a background of an uncertain housing market, many people will consider improving their home rather than moving. That option is likely to gain even faster ground as homeowners weigh up the cost of moving – putting the current home on the market, the lottery of buying a new house, legal and professional charges, and the hiring of a removal company, to name but a few.
That’s not to say that there are no costs in building an extension, of course. One of your initial decisions is whether there is an economic case to be made for building an extension – so, whether the cost of building is less than the eventual increase in the market value of your home. As an article in Homebuilding & Renovating on the 12th of May 2020 suggests, this may be a difficult case to make, and you might need to look at other properties in your area with similar extensions to see how they are currently valued.
Let’s examine some of your options for financing such a project – and discover why one of the most cost-effective decisions might be to remortgage to build an extension:
- it depends how much you are looking to spend, of course, but you might be in the fortunate position of having enough to cover the costs of building an extension from your existing savings;
- as the online listings site Right Move suggests, you might want to compare the interest rate earned by your savings and the currently low cost of borrowing – you might decide that it is worth taking on a loan, rather than eating into your hard-earned savings;
- an unsecured, personal loan from your bank or building society might be worth considering if the building project is going to be relatively inexpensive;
- in the absence of any security on the loan, the interest rate is likely to be somewhat higher on your borrowing – typically over a relatively short period of up to five or six years – but at least your home is not at risk in the event of your defaulting on the repayments;
Use your plastic
- you are probably using it for a host of other purchases, so why not just use your credit card to pay for the materials and labour needed to build an extension;
- it is only at all feasible if the costs are within your credit card spending limits, of course – and remember that once you’ve maxed out the card on the building project costs, there will be no room for any further expenses;
- if you really are intent on pursuing this option, at least try to make sure that the card you are using is still under a zero-rated introductory offer – and repay the balance before that offer expires, and the interest charges pile up, or this option could prove the most expensive in terms of your cost of borrowing;
- even though your home may be subject to a mortgage, you might still consider applying for a second mortgage on the same property – known as a secured charge loan;
- your home is offered as security on this second mortgage, so as well as repaying two mortgages, you also run the risk of losing your home if you default on the repayments for either loan;
Remortgage to build an extension
- generally considered an attractive form of borrowing to build your extension is by way of a remortgage;
- this allows you to replace your present mortgage with a remortgage, increasing the amount you are borrowing (to cover the cost of building your extension) and, possibly, also extending the repayment period of your loan;
- although a remortgage is a new mortgage – it replaces the one already in place – any lender will consider your history of managing repayments on the initial mortgage;
- provided you have maintained the monthly instalments and made your mortgage repayments when they fall due, this will be to your credit, and the lender may offer a more competitive rate of interest accordingly;
- since the new borrowing is also secured against the value of your home, this too helps to ensure that you obtain the loan at a favourable rate of interest.
Many homeowners would prefer to extend their current home rather than submit themselves to the hassle and expense of moving home. Although you have several options for financing any building project, you may find that the most straightforward and cost-effective is to remortgage to build your extension.