Funding an Extension - Mind Blowing

Annisele

I'm sorry you don't feel the replies are constructive, but I think it would be irresponsible for us not to point out that £25k of unsecured debt will not look good to a lender - especially as it's nearly half your salary. Although your LTV would be better that it is now, in effect you'd have borrowed your deposit and lenders don't like that.

Options 1 and 3 also have the risk that you're talking about remortgaging in a few months time. A broker would be able to tell you the impact of £25k of unsecured debt if your extension was to be magically completed today and your house value had risen as you hope - but nobody will be able to tell you what the lender's criteria will be in a few months time.

I've seen a friend caught out doing exactly what you're planning. His mortgage lender told him that if he paid for building work on his house by credit card, he'd be able to remortgage to a better rate. A few months down the line, the lender said "sorry, no - our criteria has changed, and we won't lend you any more money because you've got too much unsecured debt".

Option 3 holds the risk that you won't be able to refinance onto a new 0% credit deal when the first one runs out.

Personally I wouldn't build the extension at all for now - I'd stick the unexpected addition in a cardboard box in a corner somewhere - but then I'm not the most maternal person ever.

If I *had* to choose one of your options 1 to 3, I'd go for 1 as the least risky - I'd know I had the loan for a long period, and that I'd still be able to afford the monthly payments if lending criteria changed and I couldn't refinance.

mike83_2

Annisele wrote: »

I'm sorry you don't feel the replies are constructive, but I think it would be irresponsible for us not to point out that £25k of unsecured debt will not look good to a lender - especially as it's nearly half your salary. Although your LTV would be better that it is now, in effect you'd have borrowed your deposit and lenders don't like that.

Options 1 and 3 also have the risk that you're talking about remortgaging in a few months time. A broker would be able to tell you the impact of £25k of unsecured debt if your extension was to be magically completed today and your house value had risen as you hope - but nobody will be able to tell you what the lender's criteria will be in a few months time.

I've seen a friend caught out doing exactly what you're planning. His mortgage lender told him that if he paid for building work on his house by credit card, he'd be able to remortgage to a better rate. A few months down the line, the lender said "sorry, no - our criteria has changed, and we won't lend you any more money because you've got too much unsecured debt".

Option 3 holds the risk that you won't be able to refinance onto a new 0% credit deal when the first one runs out.

Personally I wouldn't build the extension at all for now - I'd stick the unexpected addition in a in a corner somewhere - but then I'm not the most maternal person ever.

If I *had* to choose one of your options 1 to 3, I'd go for 1 as the least risky - I'd know I had the loan for a long period, and that I'd still be able to afford the monthly payments if lending criteria changed and I couldn't refinance.

Thanks, good reply. One thing i will say, is that when I had a recent mortgage in principle agreed, they asked for my outgoings per month, not the sum of all debts. based on monthly outgoings vs income, i would not have an issue with the full loan amount - however the lender may have a phase 2 as part of application process, that may ask that question?

Annisele

When the lender does a full application they won't necessarily need to ask you about debts (though they probably will) - the loans and credit cards will show on your credit report.

I agree with you that the issue is deposit rather than income, but borrowing a deposit can cause more problems than it solves. Even if you take the 0% option, your outgoings will be higher than they are now due to the minimum payments. So, it's *possible* that you wouldn't have got an AIP for £250k if you already had the unsecured debt.

If you knew now that you wouldn't be able to remortgage onto a better rate, and that you'd have to pay the rate your credit cards revert to on your additional borrowing, would the extension still be affordable? If not, you can't really afford to go with the credit card option. If yes, then the risk of not being able to refinance isn't as important as it would be otherwise.

Finally, does the £30k include any contingencies? My experience of building work is limited to watching Grand Designs, and that programme suggests everything costs at least four times as much as people originally estimate. In the real world I doubt it's as bad as that, but you do need a plan for what happens if the build goes badly wrong.

Caladan

mike83,
I'm going to completely tear down you proposals here, even more than a lender would (I'd like to think). Please don't take it the wrong way, it's just to give another perspective and play a bit of Devils Advocate.

1 – Bank loan @7% for 25k, 5k from cash/savings only making 3% interest. Then re-mortgage the house at better LTV after the extension (LTV would be circa 75%, so could get a rate in the 3.x%?

You may think the extension will increase the value by that much, but would a certified valuer? This is really important if your plan is to take out a Homeowner loan (further advance on your Mortgage) to pay off the loan, also, HSBC will only allow HOLs up to 80% of the property value including the existing Mortgage.

People often overvalue their own work, at the very least you'll have to pay for a professional valuation to be done to confirm your new assumed value (money wasted if it comes up short).

The same response applies to borrowing on credit cards and repaying them with a HOL.

If you can raise enough on C/Cs and/or a loan to fund the home improvements then fine, but what I'm saying is don't expect to be able to repay it with further finance on your Mortgage. It's a very risky approach on your side of things and if it doesn't work you have to ask yourself if the higher interest you pay on the loan and certainly the cards can justify the extension.

Thanks, good reply. One thing i will say, is that when I had a recent mortgage in principle agreed, they asked for my outgoings per month, not the sum of all debts. based on monthly outgoings vs income, i would not have an issue with the full loan amount - however the lender may have a phase 2 as part of application process, that may ask that question?

A Mortgage in principle is based on a property or deposit value, just because you could theoretically borrow a certain amount doesn't make a jot of difference to what you can borrow against your existing property when it comes to loan to value (percentage of equity) constraints.

Hope it helps, I'm not always doom and gloom,
Cal

Edit: If you can afford £900 a month why haven't you been saving this every month to fund your extension? I ask this not in a judgemental way, but because a lender may ask the same question and you need a good answer in place.

mike83_2

Caladan wrote: »

mike83,
I'm going to completely tear down you proposals here, even more than a lender would (I'd like to think). Please don't take it the wrong way, it's just to give another perspective and play a bit of Devils Advocate.

1 – Bank loan @7% for 25k, 5k from cash/savings only making 3% interest. Then re-mortgage the house at better LTV after the extension (LTV would be circa 75%, so could get a rate in the 3.x%?

You may think the extension will increase the value by that much, but would a certified valuer? This is really important if your plan is to take out a Homeowner loan (further advance on your Mortgage) to pay off the loan, also, HSBC will only allow HOLs up to 80% of the property value including the existing Mortgage.

People often overvalue their own work, at the very least you'll have to pay for a professional valuation to be done to confirm your new assumed value (money wasted if it comes up short).

The same response applies to borrowing on credit cards and repaying them with a HOL.

If you can raise enough on C/Cs and/or a loan to fund the home improvements then fine, but what I'm saying is don't expect to be able to repay it with further finance on your Mortgage. It's a very risky approach on your side of things and if it doesn't work you have to ask yourself if the higher interest you pay on the loan and certainly the cards can justify the extension.

Thanks, good reply. One thing i will say, is that when I had a recent mortgage in principle agreed, they asked for my outgoings per month, not the sum of all debts. based on monthly outgoings vs income, i would not have an issue with the full loan amount - however the lender may have a phase 2 as part of application process, that may ask that question?

A Mortgage in principle is based on a property or deposit value, just because you could theoretically borrow a certain amount doesn't make a jot of difference to what you can borrow against your existing property when it comes to loan to value (percentage of equity) constraints.

Hope it helps, I'm not always doom and gloom,
Cal

Edit: If you can afford £900 a month why haven't you been saving this every month to fund your extension? I ask this not in a judgemental way, but because a lender may ask the same question and you need a good answer in place.

Thanks for your views. I have always been a cash payer, unlike some who load cards and save. The rest has been mortgage overpayments and living lavishly. The extension was not planned, hence I would not be in this position, I would have saved. What I'm finding is many people find holes in my plan, but no one offers much constructive advice.......easy to pick holes you know that.

So.....what would you do in my position?

mike83_2

Annisele wrote: »

When the lender does a full application they won't necessarily need to ask you about debts (though they probably will) - the loans and credit cards will show on your credit report.

I agree with you that the issue is deposit rather than income, but borrowing a deposit can cause more problems than it solves. Even if you take the 0% option, your outgoings will be higher than they are now due to the minimum payments. So, it's *possible* that you wouldn't have got an AIP for £250k if you already had the unsecured debt.

If you knew now that you wouldn't be able to remortgage onto a better rate, and that you'd have to pay the rate your credit cards revert to on your additional borrowing, would the extension still be affordable? If not, you can't really afford to go with the credit card option. If yes, then the risk of not being able to refinance isn't as important as it would be otherwise.

Finally, does the £30k include any contingencies? My experience of building work is limited to watching Grand Designs, and that programme suggests everything costs at least four times as much as people originally estimate. In the real world I doubt it's as bad as that, but you do need a plan for what happens if the build goes badly wrong.

Hi, 30k is with contingency. Thanks for the tips. How would you do this in my position?

mike83_2

So......no matter what, I can always get a loan, which I can afford, and I can afford my mortgage no problem, even if I can't find a better rate after the work is done. Is that a fair summary?

John424

The truth is you can't afford it yet! I doubt whether you could lump it all onto interest free credit cards these days. I earn a good London salary but I doubt whether I could muster £30k+ on interest free deals at the moment. I'd also say that aside from Virgin and MBNA, which other providers allow a transfer in your current account? Not many I'd bet. The other issue is you couldn't remortgage to pay off debt these days.

I can only see two options here, one is to save religously or second, get a bridging loan from family? The danger here is that you wouldn't be able to raise extra finance to pay them back!!!!

John424

Or third. Just get a personal loan for the whole amount over 5 years which gives you breathing space to pay down a bit of debt, your LTV will improve then as the gap between the two decreasing you will remortgage to pay off debt. To be honest, loans are at 5% and mortgages at 3%, the differential is not so bad if you want the extension that badly?

mike83_2

John424 wrote: »

Or third. Just get a personal loan for the whole amount over 5 years which gives you breathing space to pay down a bit of debt, your LTV will improve then as the gap between the two decreasing you will remortgage to pay off debt. To be honest, loans are at 5% and mortgages at 3%, the differential is not so bad if you want the extension that badly?

Thanks. This sir, Is precisely my OPTION 1 (from my original post). I see no way why this wont work.

"1 – Bank loan @7% for 25k, 5k from cash/savings only making 3% interest. Then re-mortgage the house at better LTV after the extension (LTV would be circa 75%, so could get a rate in the 3.x%?"

Okay, so I'll still have a loan to pay off, but I will likely get a better mortgage deal to counter balance the loan payments!

There's no reason why this would not work, despite some of the comments. My whole credit card scenario was kind-of the same thing, but using credit cards to pay for the extension, paying small fees to move to 0% cards whilst I chip away at the debts.

Unlike a loan where the full interest gets applies up front (lets say 5k for a 25k 5 year loan) the credit card fees of around £300-500 time for each balance transfer would be cheaper if I could pay off in the same 5 years (would need 3 balance transfers - each getting cheaper as I pay it off).

Based on that - I don't see why it is still not an option (besides my unanswered question "how do I pay a builder on a credit card".

Anyway - if all elase fails, Tesco loans here I come......

Cheers