Borrow to renovate or use savings

Bluey87

We intend to start a renovation of our home in 2022. The house was purchased for £315,000, its a beautiful double fronted property that is in need of a lot of repair. Complete rip out, new electrics, plumbing etc. I estimate that once we complete the job the property will be worth around £550,000 possibly more, which is in line with the properties on our street and in our area. We're adding a driveway since it doesn't have one (the only house on the street that doesn't) it was split into two (badly) and the huge garden sold off to build a new house back in the 80's. We ended up with the short straw, I actually had to buy a part of the neighbours garden off them since we were using rights of way to get into our house. We are also converting a large cellar into a cinema/TV room, gym, storage and utility. 

My question is should I use the money I have in the bank + borrowing, I was intending to arrange around 30K or would it be better to keep the cash in the bank and borrow as much as possible against the house? A few numbers below:

Current LTV is 67%, I have savings of around 72K which I add £1,650 to each month and the mortgage is £951 which includes an over payment of £100. I would expect bonuses plus any dividend I take in 2022 to be around the £10,000 mark (that is also being very conservative, could be a lot higher)

I am waiting for the surveyor to come and price the job but I have been told to expect it to be around £120,000 to complete, that was my family builder who project manages a team of people who renovate old buildings and is most likely going to do the work for me. 

So cash or borrow? Any other ideas welcome. 

p.s. I do fully appreciate the rates of borrowing are set to rise however having liquidity is also very important and it seems that building this cash up to spend it is quite an unappealing predicament. 

theoretica

If you borrow instead of using cash you have you would in effect be borrowing in order to put the money into savings.  If you didn't have any savings, or a renovation project, would you borrow money so you did 'have' cash in the bank?

On the other hand, if you spend the cash you have and the project runs over budget would you be able to borrow what you need?  For a project of this size you need contingency somewhere.

Brie

How is the builder going to want to be paid?  % up front?  Cash on completion??  You'll need to know when you'll need the money.

And how are you going to borrow?  Add to your mortgage?  Put it all on a credit card (directly to builder or via balance transfers)?

It might be an idea to get the plans and quote from the builder to put together a application together for your mortgage provider to get something in principle agreed even if it's too soon to take it up. 

It's possible that by the time things are under way you may have saved significantly more and got a mega bonus as well.

dimbo61

Are you looking at a new mortgage with another lender ?
Rates are very good at 75/60% so have you got a lender/deal in mind ?
Have you considered an offset mortgage ?
build up savings to pay for the works in stages while keeping your Emergency pot in the offset accounts
We love them 

Bluey87

Brie said:

How is the builder going to want to be paid?  % up front?  Cash on completion??  You'll need to know when you'll need the money.

And how are you going to borrow?  Add to your mortgage?  Put it all on a credit card (directly to builder or via balance transfers)?

It might be an idea to get the plans and quote from the builder to put together a application together for your mortgage provider to get something in principle agreed even if it's too soon to take it up. 

It's possible that by the time things are under way you may have saved significantly more and got a mega bonus as well.

So I would expect, as he did a large job for my dad, that we would pay on completion as he did.  Of course I will check that before they start.

My intention was to go to my existing lender and add to the mortgage.  

Yes once I have the costs from the surveyor and everything is nailed on that was my plan to share that with the lender or as I mentioned perhaps just borrow it from my business, although I would need to discuss that with the accountant as I expect there are tax implications however £30,000 from the business is of very little consequence. 

By this time next year I should have a minimum of around £100,000 whilst I expect some drop off in the economy we run our business very efficiently and the profits are reinvested so a bonus could be possible. 

Bluey87

dimbo61 said:

Are you looking at a new mortgage with another lender ?
Rates are very good at 75/60% so have you got a lender/deal in mind ?
Have you considered an offset mortgage ?
build up savings to pay for the works in stages while keeping your Emergency pot in the offset accounts
We love them 

I wasn’t really aware that I could go to another lender when I already had a mortgage, without changing completely, my mortgage is in two parts and it would be costly to move. 

So and I will do my own reading of course but just to clarify if I have an offset mortgage which my understanding is offset against my savings if they are depleted then surely I lose the benefit of the offset? Or do I release equity and use that and keep the savings, now that I have typed that surely that’s the case? They do sound like a useful thing for sure. 

dimbo61

Your right the savings are depleted as you release the money to pay the builder in stages.
You imply that you can build up savings quickly ! 
The builder should be asking for payment as each stage is completed.
He will need to pay for other trades such as electricians, plumbers, plasters etc who won't  want to wait months to get paid ( Would You ?) 
Sorry I did not know what stage your current mortgage deal was at ?
No point paying ERC,s 

Bluey87

dimbo61 said:

Your right the savings are depleted as you release the money to pay the builder in stages.
You imply that you can build up savings quickly ! 
The builder should be asking for payment as each stage is completed.
He will need to pay for other trades such as electricians, plumbers, plasters etc who won't  want to wait months to get paid ( Would You ?) 
Sorry I did not know what stage your current mortgage deal was at ?
No point paying ERC,s 

You make valid points and yes can build up savings pretty quickly but sometimes you get to a stage where you’d like to smell the roses for a bit. 

getmore4less

Which lender?

Look at the rates for borrowing up to 75% and 80% on current valuations

payment does not seem to be an issue and the extra can be over a longer term if needed.

from your numbers 

£315k  67% borrowing  £211k   £851pm,  rate should be ~1.5% at that LTV, makes the term in the range  1%  >=23y2m to  2% <=26y8m 

extra borrowing to 
75% £25k
80% £57k
(on £315k purchase, may already be higher depending how long you have had it some areas are up 10% in the year.)


if the rate premium to go to 80% maybe limit the borrowing to 75% to keep the costs down

Payment over 26y 8m at 2% of total with £25k added £952 same as what you are paying now

in 12months 72k + 25k + (12*1650)  ~£117k  still a bit short of £120k but project may take longer and may have bonus/retained to work with.

£25k 2% over 2 years £1k   less than 1 product fee if changing lender.
 


Having too much cash to do the work is better than running out and begging for more

Although working with mates rates there is probably some flexibility  on timing and the LTV should have improved enough to make it less of an issue.



I think you will struggle to find an offset product that works out cheaper over the couple of years involved with this project.
That will to some extent depend on lender and how long you have left on any fixed product/ERC  before you need to consider a switch.