Should I build extension or repay mortgage?

maria2014

Hi everyone,

I'm really struggling with a decision and was hoping someone here could give me some advice please.

I have finally saved up £30k for an extension. My house is a mid terrace 3 bedroom house in London zone 3. There is currently a poorly constructed extension in place but it's not made out of brick.

I was originally planning to knock it down and rebuild the extension, make it a larger kitchen/dining area, and put a downstairs bathroom where the current small kitchen is. Then the dining room now will become a downstairs bedroom which I can rent out for maybe £6k per year.

But my mortage is £160k outstanding and I was thinking maybe it is safer if I repay that first? I would safe around 3% interest.

I'm not sure the cost of the extension would be fully recovered through increase in house value, even though the rent returns are higher.

Any advice/opinions?

foxwales

Think of it this way; lets say you built the extension, spent the £30k and then something happened which meant you could no longer pay your mortgage and your house got repossessed. You would have lost that £30k.

If you pay the £30k off your mortgage, this will put you in good favour with your lenders, so if the worse did happen, they would be more open to you taking payment holidays.

Also with the mortgage paid of sooner, you will have greater financial freedom and the security of a house which you outright own.

It's a no brainer in my opinion.

andrewf75

I wouldn't build the extension if you're planning to rent it out. Only do it if you want it and plan to live there at least medium term.

Also extensions always end up over budget. If you have a budget of 30k, make sure you have at least 40k

Doozergirl

I'm inclined to agree with Andrew. I wouldn't build an extension for rental purposes. If I wanted to live there for a good while or I could improve the house value for sale, yes.

How much is the house worth at the moment? Obviously, the higher the value, the better return you will make on an extension.

maria2014

Doozergirl wrote: »

I'm inclined to agree with Andrew. I wouldn't build an extension for rental purposes. If I wanted to live there for a good while or I could improve the house value for sale, yes.

How much is the house worth at the moment? Obviously, the higher the value, the better return you will make on an extension.

About £400k going by Zoopla, I estimate the extension will cost between £20k and £35k but I haven't had any builders round to quote.

It wouldn't be for my benefit, mainly just as an investment/saving...I want to put the money to good use

Doozergirl

Not many extensions cost £20k! How big an extension are you planning?

It could add a fair amount to the value if the house is relatively small. What will it add to the house in terms of rooms?

somethingcorporate

Where is your house? £500 a month for a room in a house sounds costly, you can rent your own 2-bed terrace for that in this part of the world.

You need to make sure you have all the numbers correct before making a decision:

1) how much will the extension cost?
2) how much will it add onto the value of your house (ask a local EA) or have a look at the sold prices of similar houses with that extension done.
3) how much could you realistically get for the room?
4) do you really want to share your house? I'm not one to often recommend it but £30k is a fair way towards a deposit on a B2L which means you have all the fun of being a LL without actually having to share your property with a stranger (although this comes with a bunch of other risks too).

maria2014

It will extend 3.2 meters from the back of the house, but I've also factored in the new kitchen and bathroom costs.

I live in north west london, zone 3. I'm already renting out to 2 lodgers as there's no other way I could afford the mortgage payments, and they both pay £500.

I am actually getting an estate agent round tomorrow to give me a valuation, and I was going to ask if redoing the extension first would help the value... but I feel a bit cheeky for asking him to come round as I have no intention of selling the house!

In terms of what rooms it adds.. really just a bigger kitchen and downstairs bathroom.

SplanK

If it was me, and you can only just about to afford mortgage repayments I would not build the extension OR overpay unless I had additional funds which would cover me in the event that a lodger or both leave and you are unable to re-fill this void.


If you have suitable funds in addition to this money, then you need to see what the extension would bring in terms of value to the property (IE will you get your investment back) as well as the value it will bring to yourself in terms of quality of finish or extra space, and in your case if you wish to continue doing so, how much more attractive the house would be to present and future lodgers.


If you over pay, you will set yourself up for savings in terms of less interest paid, BUT you will have to live with the house as it stands at the moment


Could there be some sort of compromise where part of the money is spent to modernise existing fittings and what ever is left put into over payments/rainy day fund?

PasturesNew

If you've already got 2 lodgers, plus you, another lodger might be problematic as a lot of mortgage and insurance companies don't like you having more than 2, so costs can go up there. And, it's another person fighting for kitchen space/bathroom space/.... space.

Better the bird in the hand than 1000 in the bush.

Not to mention the loss of rent as lodgers won't be wanting to live there while work's going on, so your current lodgers will most likely move out.

tired_dad

In London! Extend. You'll make more than any bank can offer or any mortgage overpayment will save.

However, if you can only just make the mortgage payments and feel financially vulnerable it's fine to overpay the mortgage. You can save and extend at any timepoint.