Funding a Loft Conversion

SoundMan43

Hi there,

I am now in my second house. I have a mortgage, wife, 3 kids (youngest a few months) and we are toying with the idea of a loft conversion to give us enough bedrooms and also a 2nd bathroom of sorts as we currently only have one.

I understand that most people re-mortgage to fund such things but I want to make sure this is correct and need to understand exactly how things are done.

So, say our house is now worth approximately 60k more than we bought it for (it's just been revalued by an estate agent) and we've had a mortgage for nearly 10 years, they said that we would get the existing lender to release the additional equity or something, but this is where I don't quite follow.

Does it mean they could give us the difference between the current value and the original value as a lump sum to fund the extension and then that get added back on the mortgage meaning that the monthly mortgage repayments go up? or is it "free" money? How does it work? How did you do it?

Many thanks in advance.

BarelySentientAI

To use an example:

You originally took out a £150k mortgage over 25 years on a £200k house.  The house is now worth £250k and your mortgage balance is £125k with 15 years left.

What you effectively do is take a new £175k mortgage (either over 15 years or often a new 25 year term), use £125k to pay off the old one, and keep £50k in cash for the works.  Or a new £150k mortgage to match the old one and have £25k left over.

The house value increase is important for headroom and LTV.

It would make the mortgage payments higher of course, and could be much higher if you keep the shorter term.

Elliott.T123

I did very similar (although I went out not up) we borrowed an extra £200k to do work on the house. We had quite a bit of equity in the house to begin with as we had sold two properties when we bought this one.

We also had  lot of wiggle room as when we had first mortgaged I was newly self employed and so my income wasn't taken into account, when we re-mortgaged I had been going long enough for this to now factor in.

In short we had to go through all the usual affordability checks and also an updated valuation.

You mortgage will go up per month to factor in the extra borrowing and you will need to have enough equity to cover the cost.

For example, house purchased at £500k with a £250k mortgage. Re-mortgage 2 years later taking out an extra £200k (in this time valuation has gone up £50k.
New situation £450k mortgage vs £550k valuation - Our monthly payments went up significantly due to this but for us it was worth it. 

Note that they will value the property at its current value not the value after the work you plan to do 

EssexHebridean

If you increase the size of your mortgage, then either your payments will increase, or alternatively, if you don't want increased payments, your term will increase. Think carefully about the risks associated with both options - the first could give you problems if the worst happened financially and you lost some of your income. The second might disrupt financial planning for retirement as it takes you closer to pension age. 

Is the loft extension a "need" or in honesty a "want"? Certainly there are huge numbers of people who manage perfectly well with a single bathroom - until recently it's been pretty standard for most homes. would a compromise be to add a downstairs loo somewhere along the line to increase capacity in that department?  On the bedrooms, are your kids of the right "flavours" and ages to allow sharing for the next few years while you save money to deal with extending upwards? Is this your forever home, or will you be looking to move at some stage anyway - if the latter, then might it be better to consider a move now rather than spending money you may not get back when you sell? 

Are you currently on a fixed mortgage deal, and if so how long do you have to run on that? 

RHemmings

In your situation, OP, I would be tempted to work out how much I can afford to save towards the loft conversion per month, and how much it would cost. Then I would be wanting to think whether I could wait until I've saved the full cost of the conversion, and take out no additional debt at all. 

It depends on how expensive a loft conversion you need and/or want. And, how much you can save per month. And, you can work out how long you would need to wait. And, whether this fits your circumstances. 

A half-way house is to save up some of the cost of the loft conversion. E.g. half. And then not have to wait so long balanced with having to pay interest. 

I played around with some numbers, assuming a current debt of £150,000, with £30k needed for a loft conversion. (Though, perhaps, your loft conversion sounds a bit of an expensive one with an ensuite). Assuming 4.5% interest on the debt, then the interest will be about £7300 more than it would have been without the loft conversion, meaning an extra £330 per month or so. Of course, there will usually be fees to remortgage, and those costs go on top as well. 

Presumably since you are asking, you don't want to wait. But, ..., like before - is this really a need, and need right now, not a want? 

eddddy

In simple terms...

• You took out a loan (mortgage) to buy your house

• The estate agent is suggesting that you could increase the loan (mortgage) to give you spare cash to cover the cost of converting your loft

• You can ask a new lender to give you a new bigger loan (but you might have to pay a 'penalty' for paying off your current loan early)

• Or you can ask your current lender to lend you more

• Your current loan might be at a cheap 'fixed rate'. If so, the new loan or extra loan won't be at the same 'fixed rate'. It will be at 'today's rates', which might be much higher

• Before lending you any money, the lender will want to value your house, and check your affordability. (The lender's valuer might not agree wit the Estate agent's valuation.)

• Depending on the mortgage product you choose, you might be able to borrow 90% or 80% or 75%, etc of your house's new valuation 

Albermarle

OP- You need to consider how much extra space a loft conversion will bring. This to some extent depends on the current shape of the roof, and of course the size of the existing house.. So not just how much you want to spend ( although that is important too).

A number of our neighbours are standard interwar semis, with hipped roofs. The ones that have done loft conversions have resulted in a rather cramped space. Maybe just enough for a one child bedroom. A bit bigger with one dormer.

Our house has a little bit bigger footprint ( about 15% bigger) and a gable ended roof. Our loft conversion is spacious and is a large double bedroom with en suite ( including a half dormer on one side) .
Our neighbour with a similar house, has two smaller bedrooms and an ensuite in theirs.

So although our loft conversion cost more ( being bigger) we got better value from it than our neighbours, in terms of cost vs M2 of habitable space.

Something to consider when making your decision.