Mortgage based on future value of house?

jefectio

Hello all,

I was hoping for some early advice please; we have a Nationwide mortgage 95% LTV that we took out 3 years ago. After the property went up in price we since took some further lending up to 85% LTV of the new house price.

We are now looking to do some significant redevelopment work that we are advised by estate agents will significantly increase the house price. The problem is we need to fund the work and were wondering if we could try and increase our mortgage based on the future value of the property?
For example the build work is probably 15% of the current house price, taking our requirement to ~100% loan to current value, but conservatively we estimate this same figure to be ~75% loan to future value of the house.

Just wondered if someone could help advise if mortgage providers will ever review redevelopments and loan against proposed plans or if we would need to look elsewhere. The figures involved are relatively large so a loan or credit cards to cover us until we remortgage with the new improved house would be difficult.

Thanks in advance for any help you can offer?
Simon

DVardysShadow

They will only mortgage to 100% of the value at any given stage, and often not to 100%. So if your project will only increase value when the last painters brushstroke is applied, then you will have to find another way of financing to that point. After taht, you can mortgage.

Joseph_Schumpeter

jefectio wrote: »

Hello all,

I was hoping for some early advice please; we have a Nationwide mortgage 95% LTV that we took out 3 years ago. After the property went up in price we since took some further lending up to 85% LTV of the new house price.

We are now looking to do some significant redevelopment work that we are advised by estate agents will significantly increase the house price. The problem is we need to fund the work and were wondering if we could try and increase our mortgage based on the future value of the property?
For example the build work is probably 15% of the current house price, taking our requirement to ~100% loan to current value, but conservatively we estimate this same figure to be ~75% loan to future value of the house.

Just wondered if someone could help advise if mortgage providers will ever review redevelopments and loan against proposed plans or if we would need to look elsewhere. The figures involved are relatively large so a loan or credit cards to cover us until we remortgage with the new improved house would be difficult.

Thanks in advance for any help you can offer?
Simon

Hi Simon,

With regards to "advised by estate agents will significantly increase the house price", take that advice with a LARGE spoon of salt. Estate agents are still largely in denial, so I would seriously look into their assumption and how they have quantified it. People generally over estimate the REAL gain from redevelopment/extensions etc and simultaneously underestimate the total cost of doing it. That is because people tend to get emotional about it rather than business like. Remember - a mortgage is extremely expensive, the longer the term of the loan. People don't tend to factor that rather large reality into their calculations...and the banks don't exactly advertise how much you have to give them for the facility. Check out the Guardian Web site - they have a real Mortgage calculator which gives you the interest cost of borrowing as apposed to what one can "afford".

Remortgaging constantly without reducing your principle is Financial 101 suicide - better to pay it of ASAP. Reduce the term and make higher payments. That way you will start to make your money work for you, and not the bank, by saving/investing.

With regards to your question, I don't think you will find any banks willing to offer you more money based on a "fictional" future value. The future value may very well be less than the current value. House prices are still falling, and don't let the press confuse you by their recent statements that house prices are now rising.

They have risen in pockets of areas over two months, and that is EXACTLY what happened at the end of the 80s...house prices declined over a long period, but had seasonal fluctuations in geographic areas.

Also, the Volumes that they are calculating the housing data from are very small - so it's not a real statistic, but a relative one to the current market and the current volumes, and it's important to make that distinction, house prices in geographic pockets have incrased based on the very low volume of house sales.

I would wager that; when the masses return to the property market to sell (assuming quite a few people are sitting on property for as long as they can in a hope prices rise a bit before they sell, and they have despretaly want to sell for the last 12 or so months) the property market will take a significant downward dive... in the next 24 months. That’s only an opinion though. DYOR

I appreciate the future value of your house will rise in the LT but I would be VERY surprised if any of the retail banks take that into consideration, because that is effectively offering credit on a non guaranteed capital/cash flow. Non-Recourse Finance is not offerd to normal people, only wealthy organsiations or PE types with a very solid track record.

In my own opinion, in the current market climate, I would say the best option; if you are absolutely going to develop for personal reasons – ie you want to/need to live in a bigger house - if you can go down this route, would be a low interest rate family loan from someone that would help you.

But seriously - I would not go down this route based on future expectations that it will increase your house value and that this justifies borrowing money for it today. It may well do, but it might be a "stranded asset", in that you put all this money into it just now, but the market does not recover for another 7 years - so your lumberd with it for that time.

It took about 8 years for the house market to recover from the late 80s boom/bust cycle. What is startling obvious, and very relevant in this current situation is that, at the end of the 80s, there was not a systemic melt down of the international financial system.

In contrast, this is exactly what occurred this time. OK, the Government largely adverted a complete melt down, but remember, the Gov had to take over 3 very large banks and along with the rest of the World, they had to pump obscene amounts of money into the World economy! Don’t underestimate how long term/ large the impact from this crisis will be on the real economy and the housing market over the next decade.

Lastly, funding this redevelopment with Credit cards or Loans is just not a prudent option. You don't seem to be considering it at this point, but please don't consider it for one minute as it would end in tears.


Ciao

JS

Jacka87

If you bought your home at a high ltv and then got additional borrowing again at a high ltv I would say your first port is to reduce the ltv. As the previous poster said financial 101!

Please do not borrow money to redevelop your home unless you need to, ie you have just had triplts and will need to build an extension to house them!

In terms of adding value to your property, the previous poster said that it is unlikely for say the next 10 years. Well I cant predict the future but I would not bet too much against his call. The thing is even if he is wrong and its only the next 3-5 years, the extra mortgage costs over that time will also be considerable and that may negate any potential profit. However you will have the worry every month when prices go up then down and then rates rise etc etc.

I would say that if the whole idea was born out of adding a bit of value to your home and maybe making a little long term investment then STOP! I would normally think like that as well, but the timing is not good for you. Pay off some of the mortgage and in 3,5,7 or 10yrs, however long it takes than you will be in a position to have a lower ltv, some savings and also know the economy and housing market is looking stable.

jefectio

Thanks all for your very helpful replies.

We continue to do our homework and your advice on the financials has been very useful. Regarding the work our research is still definitely saying it makes economical sense; it is changing a large 1 bedroom London flat into a 2 bedroom with more reception space, it is also likely to mean we will start and family and stay in London for the next 5yrs or so and as we are not yet ready to move outside London it saves the cost of an internal London move. We have also looked at 2 bedroom flats in our current location and believes our future flat stacks up favourably at way beyond the the current value and build cost, this is being backed up by 3 estate agents, our own research and friends buying in selling in the same area/market. A final point being that our property has still gone up in value over the last 18mths, so hopefully we are in an area that is slightly more resistant to the poor economic conditions.

I think your advice has helped us refine our thoughts and our plan will hopefully be a very short term family 'loan' for the main build work and then remortgage against the improved house and payback the loan asap.

We feel we can absorb an increased mortgage repayment relatively comfortably at and beyond current rates and following your advice I think we will likely do this at as low a build cost as possible and then take some further time on the interior fittings and decorations as we save up money to make the improvements.

Thanks again for your advice it most definitely helped us focus on the detail and not as you mentioned the emotional or fictional potential of our plans.

Best Regards, Simon