Mortgage or Loan

WhoME

Hi I’m looking for some advice, we are going to get our loft converted next month. I expect it to cost in the region of £50k (depends on the finishes we go for, carpets, whether we get fitted wardrobes etc). 

Our house without the loft conversion is worth c£380k, there is £118k / 15 years left on the mortgage on a fixed rate of 1.69% with First Direct (expiring in May 2027). The monthly payment is £770, we pay £900 a month as this is what we were paying before we remortgaged onto a lower rate and the extra just goes as an overpayment.  

We have £25k in easy access savings (plus a £3k emergency fund) so we will need to borrow a minimum of £25k. Our options are:

1) borrow an extra amount on the mortgage from first direct, we could borrow £25k or we could borrow the full £50k and leave the savings as they are. The rate is 4.04% for 5 years for both anmounts and we would probably borrow it over 15 years to match the current mortgage but over pay the new mortgage instead as it will be a higher rate.

2) take out a £25k loan at 6.1% over 7 years. This is obviously a higher rate and shorter repayment period so we may pay less interest overall but we may not if we can repay option 1 in 7 years.

I’m leaning towards option 1) but borrowing £50k in case we end up over budget then paying back in any money we don’t use.  I’m also not sure we want to use all our savings and just have a tiny emergency fund left as our spending has increased (we just had a baby so I’m on mat leave) and I’m not sure where our expenses will end up in the medium term (more on nursery but less on coffee and baby classes). We earn £130k between us (split £60k/£70k), we are still able to save £600 a month even with me on SMP so we are happy we will be able to pay for the attic it’s just how?!?

We don’t have any debt other than the mortgage, we bought a (new to us) car last year for £20k in cash which will hopefully last us a good few years, we will have the nursery to pay from January but this is accounted for by my pay going from SMP back up to full pay.

Zerforax

I think option 1 makes the most sense. It's a cheaper rate but you will also have some flexibility on how you pay back (whether using the usual 10% overpayment allowance or making larger repayments between mortgage deals).

Work on houses often increase more than initially budgeted for so I would probably borrow the £50k from mortgage and then you have the £25k in savings to cover any unexpected increased costs (although maybe I would borrow 40k and then have the £15k in cover). Some people prefer to have a higher emergency fund than £3k, especially once you have a little one.