New house or loft extension. Can someone help me do the maths?

[Deleted User]

Hi all

Married couple, 2 children in a small 2-bed terraced house. Children are aged 6 and 3, one is in their own room and the younger one sleeps in the bed with us. Plan is to get a bunk bed eventually, but the older one already likes his own space and eventually we will need an additional room.

We bought the house for £285k, it's worth around £315k - £330k and we have 12.5 years left. Current rate is 1.74% and we pay just over £1,400 a month and that deal expires in 2025. 

Neither of us like to work and the thought of being mortgage free with a decent paying job is top of the agenda. Right now, money is very tight to a point we can barely save, but nursery fees should be coming down next year giving us an extra £500 a month, and go away in 2024, giving us an additional £1,300 each month in total (compared to what we are paying now).

I am trying to work out whether we should spend around £50k on a loft extension or buy a 3 bedroom house. A 3 bedroom house should mean more general floor space but likely to mean extending the mortgage if we stay in the same area. However, with the nursery fees going soon, do we just put that towards a bigger mortgage? But how will rates be in the next 2 years? 

A loft extension is something ideally we'd try to borrow as little as possible for. Probably save half, borrow the rest, but pay it off with the mortgage and not extending it. 

I appreciate the above is lacking a lot of information to get an immediate answer, but just looking for some tips, strategies and things to think about for the time being. How do I go about formulating this?