Buying / Building / Mortgage options

kilby_007

We've had an offer accepted on a place at 230K. We have about 90K in savings. We will need to extend the house within 2 years to add another bedroom. The house comes with approved planning permission to do exactly that but ultimately we would like to add a large kitchen diner. We can do works over the next 6 months whilst renting. Costs are below (rounded):-

Stamp Duty £2100
Solicitors £800
Moving Cost £200
Mortgage Fee £1000
Insurance £200
Survey £700
Renovation cost £20,000
Total £24,000

Rough cost of small extension £25,000
Rough cost of larger extension £40,000 (inc amended planning/application)

Our options:-
1) Bedroom extension only = total cost £49,000
This leaves £41,000 for a deposit, and we could potentially scale back the renovation costs to make it up to £46,000/20%.

Pros - better mortgage rate, move in quicker.
Cons - Would have to do further extension at a later date = mess/inconvenience/larger overall build costs (long term).

2) Larger extension = total cost £64,000
This leaves £26,000/10% for a deposit

Pros - Out the way in one go, better LTV when re-mortgaging, cheaper long term build cost.
Cons - Higher immediate interest rates, less equity and potentially more risk. Delays due to new or amended planning application.

If going with the second option would it be wiser to go for the shortest possible term and then get it revalued as early as possible, or am I playing a risky game if I don't fix at a low rate for 5 or more years? I'm interested to know if people think 1) or 2) is the way to go? There's room for scaling back on renovation to prioritise the extension if needs be.

kilby_007

Anyone any advice? Thanks

Mrs36

I think it all depends how risk averse you are and what you are comfortable with (sorry!) Personally I would always go for a better LTV, however I can't see it would be very nice to live on a building site and the temptation of getting the building work out of the way before you move in!

kilby_007

Mrs36 wrote: »

I think it all depends how risk averse you are and what you are comfortable with (sorry!) Personally I would always go for a better LTV, however I can't see it would be very nice to live on a building site and the temptation of getting the building work out of the way before you move in!

Ultimately I think with the second option we'll achieve a much better LTV when we remortgage after 2 years, provided the lender gives us a valuation that reflects what similar properties are going for in the area (>300K). We could end up with a LTV of 65% but if the interest rates rise in that period then we could end up paying a higher rate than we'd got with a 10% LTV at current rates anyway! I suppose that's where the risk lies.

I'm leaning towards getting it all out of the way first. If the worst happens and interest rates shoot up by 3 or 4 times what they are now, we will still be able to afford the monthly payments without it affecting our liffestyle. Although it pains me to give the lender more than I have to, sometimes you have to trade off your financial security for whatever your needs are now I guess.

Mrs36

I don't envy you having to make that decision! Good luck with whatever you decide.

What sort of difference is the monthly payments on options 1 and 2. Have you looked at an amortization calculator to see where you would be in 2 years with both options when you remortgage? That might be worth a look.

Is it your forever house or would you be buying with the intention of selling after refurbishment?

kilby_007

Mrs36 wrote: »

What sort of difference is the monthly payments on options 1 and 2. Have you looked at an amortization calculator to see where you would be in 2 years with both options when you remortgage? That might be worth a look.

2 YEAR FIX:-
20% = 1.29%APR / £721 Balance at Y2END = £171,362
10% = 2.15%APR / £893 Balance at Y2END = £194,217

5 YEAR FIX:-
20% = 2.28%APR / £805 Balance at Y2 END = £172,822
10% = 2.89%APR / £970 Balance at Y2 END = £195,370

IF after 2 years (when remortgaging) interest rates increase 2X THEN monthly payments:-
IF increase in value to 300K: £855 @ 65%LTV (2.3%APR)
IF no increase in value: £1127 @ 90%LTV (4.3%APR)

IF after 2 years (when remortgaging) interest rates stay the same THEN monthly payments:-
IF increase in value to 300K: £753 @ 65%LTV (1.21%APR)
IF no increase in value: £892 @ 90%LTV (2.15%APR)

The above scenario (in red) would be the ideal outcome. If interest rates go up AND the house values drop by a significant value (let's just assume the house prices drop about 20% so is worth the same with a big extension as I'm paying for it as it is now) then the monthly payments will go up to £1127. I think this is a fairly extreme case although it's not unthinkable.

I feel more confident now after running through those figures, thanks!

Mrs36 wrote: »

Is it your forever house or would you be buying with the intention of selling after refurbishment?

We're buying the house for proximity to good schools. When the kids move on to high school there's a fair chance we'll move onto another place but that's a way off (12 years) yet!