Remortgaging in Jan 2009 - should I use money to overpay or renovate house?

jojoyay

Hello,
We bought our first house in Jan 2007 and our 2 year fixed rate (4.74%) is due to come to an end in Jan 2009. The house needed quite a lot of work and we are part way through that - we have fitted a new kitchen, fully re-wired, have done some re-plastering and some redecorating and improved the layout.

We currently owe approx £113k and I conservatively estimate our house is worth approx £130k - £135k at the moment (so current LTV is 84% - 87%). I'm obviously worried about house prices falling this year and want to try to have as much equity (and a low LTV) in the house as possible - so that we can get a chance of a decent remortgage rate and not end up on our lenders SVR. I'd like as much of a 'buffer' as possible as even if prices don't fall much this year a lot of people are predicting bigger falls in subsequent years.

For the rest of the year we have budgeted approx £250/month to spend on finishing doing up the house - totaling around £2000. However, I'm wondering whether we would be better off using this to overpay on our mortgage (it does allow us to do this) - essentially, should we try to increase the value of our house or decrease the money we owe on it? What would give us the greatest return for our £2000?

btw - I'm hoping that the £2000 would be enough to almost finish everything we need to do in the house, except probably carpeting the stairs, landing and bedrooms (it would go on the rest of the plastering and decorating, a new bathroom and all the flooring downstairs). Obviously there are other benefits to finishing the house - not living surrounded by dust, mess and unfinished decorating!

I'd really love a second opinion on this. Thanks!

James_H

I would personally do the home improvements. I would even consider keeping the money in savings above paying off part of the mortgage. But is does depend on your circumstances.

It depends on what state the house is in at present. Hopefully spending £2k should increase sale value of the house by around that much. However, you won't know the valuer's philosophy. If the place is a bit of a building site at the time of valuation, they could think the place would be difficult to sell and depress the valuation by more than £2k of the finished house value. On the other hand, they could see the work in progress and not value it much different to if the work was done.

I'm guessing you originally had a £116k loan over 25 years. If so, your outstanding balance should be nearly £2k less than it is now come next January, helping the LTV.

Maybe only spending part on improvements would be preferable. If you already have carpets down and an acceptable, if old, bathroom, the improvements may make little difference to the valuation. But if you have bare walls, then getting those plastered and you painting them would get rid of the building site look.

From my first sentence, I'm assuming you aren't a higher rate taxpayer. If the guess is right, and you decide not to make the home improvements, then you could be geting 5.2% net at present from a top-paying savings account, earning more in that than the interest being saved on the mortgage if you overpaid. Plus having the money in savings gives you flexibility for unexpected bills, change your mind and do the improvements, or reduce the mortgage in anyway Janaury if you really need a lower LTV.