An increasing number of homeowners are borrowing additional cash when re-mortgaging, as they look to fund home improvements rather than step up the property ladder.
Homeowners are reluctant to move due to a ‘cool’ property market and are instead focusing on adding value to their current homes.
But is it never a good idea to increase your mortgage debt by releasing equity to fund renovation work?
Homeowners re-mortgaging to fund improvements
If you have a repayment mortgage, your monthly payments will gradually pay off the loan over the term of the mortgage. This means that, when you come to re-mortgage at the end of your introductory period (usually two or five years), you should be able to obtain a deal with a better rate, as you’ll have paid off some of your loan and can re-mortgage at a lower loan-to-value (LTV) ratio. However, a small percentage of homeowners are borrowing more than their remaining balance at the point of re-mortgaging increased by 12% at the end of 2018.
Low mortgage rates could mean increased borrowing
Major home improvements, such as an extension or loft conversion, can add significant value to your property. This kind of renovation work is traditionally paid for through savings or a personal loan, so why are borrowers now choosing to add debt to their mortgage instead? The answer may well lie in low mortgage rates. Right now, it’s possible to re-mortgage to a two-year fixed-rate deal with an initial rate below 2%, even at 90% LTV.
How much more will re-mortgaging cost me?
Imagine you’re coming to the end of your fixed term and are wondering whether to fund that dream loft extension or man cave by borrowing more on your mortgage. Let’s say that you’ve got £150,000 left on your home loan, and your property is now worth £200,000. This means that, without any further borrowing, you’ll be able to get a new mortgage at 75% LTV. If you choose to borrow more to fund your renovation, however, you might need to obtain a mortgage at a higher LTV of 85% or 90%.
The dangers of increasing your borrowing
In the grand scheme of things, an extra £50 or £100 a month might not seem like a huge amount, but remember that this is being added to the total cost of your mortgage, which you could be paying for 25 years or more.
Re-mortgaging up to 95%.
Many lenders will allow you to re-mortgage up to 95% of the property’s value, but this isn’t always a good idea. You might have read that 95% mortgages have dropped in cost, but the truth is that they still remain significantly more expensive than 85% or 90% deals. And in a market where house prices are stagnating, a 95% deal can be risky, as a drop in values could leave you in negative equity (when you owe more on your mortgage than your home is worth).
Financing home improvements
Low mortgage rates have made the prospect of re-mortgaging upwards more attractive, but it’s worth considering the alternative ways you could finance your home improvements before signing up to such a commitment. Theoretically, you could get a personal loan of between £10,000 and £20,000 at a rate below 3% (though bear in mind that not everyone gets the advertised rates). A £10,000 five-year personal loan at 3% would cost you around £180 a month, while a £20,000 loan over 10 years would cost around £195 a month.