Sunday, 16 January 2011

Can you extend your way out of the property slump?

Extensions and your mortgage

If you don't have enough equity in your property to secure the most competitive mortgage rates, extending your home could be an innovative way of accessing cheaper finance. Once the improvement is complete and you have the property revalued, you may find you are eligible for a greater range of mortgages, because your home is worth more, but your home loan is at the same level.

For example, if you have a loan equivalent to 65 per cent or less of the value of your home, you can access deals such as First Direct's five-year fixed-rate mortgage on 3.89 per cent, which has a modest £99 arrangement fee. If you only have 10 or 20 per cent equity, you will struggle to get a deal, and will have to pay higher rates such as Skipton Building Society's 5.78 per cent five-year fixed rate, which has a hefty £995 fee on top.
Many people finance home improvements by adding to their mortgage, but this has become more difficult, particularly for those with little equity in their homes.
You used to be able to provide lenders with the plan of an extension, get a value on the completed project and then get an offer based on that, this is much more unlikely now, though small or medium lenders may do so.
If you had a high loan-to-value (LTV) in the first instance, you may struggle to get a further advance from your lender, even if the work you planned on having done, such as a loft conversion, would add value and ultimately improve your equity stake,
Those borrowers already on high LTVs would realistically have to use their own money to fund home improvements.
However, Nationwide says it is prepared to listen to existing borrowers who apply for extra money for home improvements, on a case-by-case basis, studying any plans they have in place.

Other financing

If you are sure your planned improvements will add value, but your mortgage lender won't listen, you do have other options in the short term.
suggestion is that you may be able to put some of the cost of the improvement on a 0 per cent credit card for a year, and then pay it off by remortgaging at the end of the loan period, after your home has been revalued. This would depend on how much money you needed, of course, and how confident you were in the project. Other sources of finance include personal loans, which are unsecured, and are coming down in price.
Over the past few weeks we have seen Tesco Bank, HSBC, Barclays, First Direct and Sainsbury's Finance all cut rates on personal loans above £7,000. Sainsbury's is currently the best buy at an annual percentage rate (APR) of 7.4 if you have a Nectar card.
Finally you could get a second charge on your property, which is basically a more expensive mortgage which is also secured on your house. This arrangement would cost you about 10 per cent interest, which is far more expensive than most ordinary home loans.

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