Remortgaging for home improvements - how does it work?

TrixA

We bought our house 2.5 years ago and are now planning some significant improvement works (ground floor extension plus loft conversion and reconfiguration of first floor). We had initially hoped to finance this from savings, but based on the initial estimates we’ve had this is looking unrealistic and we are now thinking about increasing our mortgage to cover the difference. We are halfway through a 5 year fixed mortgage at 3.99%, but were planning to remortgage anyway as values in our area have increased significantly and we would be eligible for a much lower rate (sub 2%) – the MSE ‘ditch your fix’ calculator recommends ditching. We would be proposing to stay with our existing lender (HSBC) as they seem to have competitive rates.

My question is about how the remortgaging process for home improvements works. At what point would we apply for the new mortgage, and would the valuation be based on our existing (unimproved) property or the post-improvement value? To get the mortgage rate we want we’d need to stay within 70% LTV. Once the improvements are done we should be easily within that, but pre-improvement it might be borderline. Obviously we don’t know the exact valuation so I’m basing my calculation on nearby sales and the Zoopla estimate for our house.

kingstreet

You are applying to your lender for additional borrowing and it's based on current value only.

A remortgage is a new mortgage from a new lender to repay the current one and raise the additional funds.

Thrugelmir

Impossible for a lender to judge what the value of the property would be post improvement. Then there's the possibility that the work might not even get finished.

TrixA

kingstreet, surely it's classed as a remortgage if we're breaking our existing fixed term deal and moving to a different product?

kingstreet

Nope. A product transfer and additional borrowing.

Same lender, so no change of mortgage deed required.

TrixA

kingstreet wrote: »

Nope. A product transfer and additional borrowing.

Same lender, so no change of mortgage deed required.

Does that mean we might be able to get out of paying an early repayment charge?

TrixA

Thrugelmir wrote: »

Impossible for a lender to judge what the value of the property would be post improvement. Then there's the possibility that the work might not even get finished.

We have sufficient savings to cover the structural elements of the build, the money we are borrowing would essentially be the extra needed for fixtures and fittings. I guess I wondered if there was a way we could apply for the mortgage part way through the project... but then I guess we are stuffed if the mortgage isn't approved.

kingstreet

TrixA wrote: »

Does that mean we might be able to get out of paying an early repayment charge?

No. A change of product or repaying the mortgage in full by any means will normally see the ERC payable.

TrixA

kingstreet wrote: »

No. A change of product or repaying the mortgage in full by any means will normally see the ERC payable.

I see. Our ERC will be over £5000 so it would be nice to avoid it.

What's the process for a product transfer and additional borrowing? Will there still be the standard documentation requirements, affordability assessment etc?

kingstreet

The product transfer is usually free of status or affordability checks.

The application for additional borrowing will involve the usual requirements.

70sthrowback

I have just completed an additional borrowing requirement application with Nationwide. Its more or less like making a new application, you have to provide proof of income, bank statements etc. We also have our home revalued at the same time. It took less than a week from interview to get approval including a site visit valuation.