How does remortgaging work for extensions.

jamie_128

So we bought a house and we loved most things about it but now we are in we kind of wish we had gone for a 4 bed for future reasons and we also wish it had an extra lounge room downstairs, we have rushed into it a bit BUT the house has many upsides and the downsides can be solved with an extension. 

Now itll be a few years yet until we extend and realistically we will be looking to remortgage to do the extension in 5 years time. 

Now im confused how this works, hypothetically to make it easy we will assume that i bought the house for 100k, i put a 10k deposit in (10%).

In 5 years lets say ive paid off 5k of the equity, so i now have a 15% deposit in the house.

If i needed to borrow say 20k to do the extension, it would then mean i have a 15k deposit in a 120k house which means its less than a 10% loan to value.

Would i realistically have to put in a bit more cash as deposit in order to borrow the funds? And im assuming to borrow the funds i would need to prove the house will be worth more as a result of the work?

Is there a simple way to explain it? Can i borrow more before my mortgage deal is up or will i just be locked in until the end of the term if i stuck with the same bank? 

eddddy

It's probably best to look at it this way:

When you first buy the property:

• You decide to choose a mortgage product with a maximum 90% 'loan to value'
• The bank values the property at £100k
• So the bank will lend you up to 90% of £100k = £90k (So you borrow £90k)

After 5 years, you need money to build an extension, so you need to remortgage:

• You still owe £85k on the mortgage
• You decide to choose a remortgage product with a maximum 90% 'loan to value'
• The bank now values the property at £110k
• So the bank will lend you up to 90% of £110k = £99k 
• So you borrow £99k and repay the old mortgage of £85k
• So you've borrowed an extra £14k that can go towards your extension

That assumes that the property increases in value from £100k to £110k over 5 years.
Alternatively, if it's still worth only £100k after 5 years - instead of borrowing an extra £14k, you'll only be able to borrow an extra £5k

AdrianC

jamie_128 said:

Now im confused how this works, hypothetically to make it easy we will assume that i bought the house for 100k, i put a 10k deposit in (10%).

In 5 years lets say ive paid off 5k of the equity, so i now have a 15% deposit in the house

Equity. Not deposit.

Remember, when you're buying a house, the word "deposit" is used in two ways - it's the usually 10% that the bottom of the chain puts in at exchange as security against failure to complete, and then gets passed up the chain. That really is a "deposit". But it's also used for the non-borrowed equity, as opposed to the borrowed mortgage - (100-LtV)% of the purchase. That is not a "deposit" in any usual manner.

It's perhaps easier to think of the reverse, the LtV of your mortgage.
You started off with 90% LtV, you've reduced it to 85% (assuming the value has remained the same).

If i needed to borrow say 20k to do the extension, it would then mean i have a 15k deposit in a 120k house which means its less than a 10% loan to value.

Spending £x on a property very rarely adds £x to the value.

Borrowing £105k against a property that the lender believes is worth £100k is not going to happen.

And im assuming to borrow the funds i would need to prove the house will be worth more as a result of the work?

It depends on the resulting LtV - and that proof would be in the form of a surveyor's valuation.

But remember that at the time you borrow it, the property value hasn't risen. You would be trying to borrow £105k against a £100k property, on the promise that you might in the near future make the property worth £120k (in reality, somewhere between £100k and £120k).

Doozergirl

Are we talking *very* hypothetically?  Because extensions don't cost £20k and an extension on a £100k house won't pay itself back on the house price.  

babyblade41

wish I could do an extension for 20k !!!

AdrianC

Doozergirl said:

Are we talking *very* hypothetically?  Because extensions don't cost £20k and an extension on a £100k house won't pay itself back on the house price.  

Conservatories could be viewed as extensions...

Doozergirl

AdrianC said:

Doozergirl said:

Are we talking *very* hypothetically?  Because extensions don't cost £20k and an extension on a £100k house won't pay itself back on the house price.  

Conservatories could be viewed as extensions...

But they're specifically not extensions, they are outbuildings.  If they were, they'd be subject to building control.   

foxy-stoat

If you can save £350 a month now in 5 years you will have £21,000 cash to put towards your extension.  Just dont put it in premium bonds as it will reduce my chances of winning.

Thrugelmir

jamie_128 said:

Would i realistically have to put in a bit more cash as deposit in order to borrow the funds? And im assuming to borrow the funds i would need to prove the house will be worth more as a result of the work?

Future value has no bearing on the remortgage application. Current value is what matters. Overpay your mortgage and build up some more equity that can be released to fund the works. 

jamie_128

Extension for 20k was hypothetical, however i have had quotes for a single storey extension 3mx3m for 15k, obviously a double storey will be more than that. 

Freecall

jamie_128 said:

Extension for 20k was hypothetical, however i have had quotes for a single storey extension 3mx3m for 15k, obviously a double storey will be more than that. 

Really!
I would be very careful indeed dealing with anybody who quotes prices as low as that, even if you live in the very cheapest part of the country.