Borrowing for home improvements?

[Wigeon]

We are considering a kitchen extension and would need to borrow the money. We are completely clueless as apart from our mortgage we have never had any debt (not even credit cards) and are very cautious with money.

What are our options? So far all I can think is: personal loan, or increasing the mortage when it expires (Dec 2012). What are the pros and cons? We are pretty risk-averse when it comes to our finances but would really like to do the extension! Any tips very gratefully received.

Thanks in advance!

When it comes to home-improvements I have always taken the view that the value of those improvements will be realised on the sale of the house. So - following on that logic - I have increased the mortgage in order to pay for them. If you have a good track record with your mortgage provider and if you have plenty of equity in your home you should be able to borrow the money cheaper via that route than if you go for a personal loan

A secured loan but interest rates are high. The problem with remortgaing at the moment is that you are likely to end up with a much worse deal on the whole mortgage as so many people are on older mortgages with rates linked to the very low base rate.

Your bank may be a good starting point. A loan will be for 5 years but a mortgage as long as 25. You need to work out how much you can afford to repay each month.

You don't have to remortgage the entire house in order to add on extra for home-improvements.

Three options:

1. Increase mortgage with current provider - advantage is that if you have enough income and equity you can start the work now.

1. Remortgage to another more competetive provider - but you'll have to wait till your current mortgage deal ends.

1. Get a secured loan through another provider than your mortgage company (2nd charge loan). Interest rates are much higher than mortgage rates though, although you can have the loan for a much shorter period than your mortgage.

Thanks very much for the replies, very useful. We should have a very good credit score and do have lots of equity (we are very lucky to have inherited money, which all went in the house). So I could just ring up the mortgage company and they could increase the mortage amount, even before the current deal runs out?

Bear in mind that if you add the debt to your mortgage debt you will be paying back (v approximately) twice that over the course of 25 years (unless you overpay). A personal loan of a shorter time will mean less interest in total.

Yes, of course, it's all a bit depressing (this is all why we have thus far avoided any debt!).

There's 'debt'.... which, to me, is borrowing cash to buy a car or something else transient that will diminish in value... and then there's 'borrowing to invest'... which is what you did when you took out the mortgage to buy the house in the first place and what you're thinking of doing now. If you expand your mortgage today to make an improvement, you will get that money back and more when you come to sell the property.

Wigeon - I would definitely add to your mortgage as the rates are cheaper then make overpayments to bring the mortgage debt down faster. This would be cheaper than taking out an unsecured loan.

I agree with Chil, it is an investment in your home, you are gaining an asset for your outlay so cannot be classed as "debt" in the same way as borrowing for a car or a holiday would be. At the end of the day you would have something to show for it.

And as the value of your house will go up, you would be able to sell the house for more to pay off the debt if you needed to. You will probably have increased the value of your home by more than the amount you have borrowed as well.

Yes, good point DancingHippoOnAcid - I think we are both so cautious with money that we need to change our mindset about this kind of debt! We are planning on staying in the house a good few years, so if we did the work now we would (a) get the use of a lovely new kitchen extension and (b) hopefully realise the money when we sell.

Have checked with our mortgage people and it seems they will only offer us (or anyone else) a personal loan (at 9% ) rather than an extension to the mortgage (currently much much less than 9%!). So waiting until the deal runs out (next Christmas) and then remortaging might be the most sensible thing.

Hm - lots to think about and I am trying to sstop DH looking at kitchen porn before we've even made a decision about the extension! ("oooh, look at this amazing corner cupboard and larder drawer" etc).

Thanks again for your advice.

Crikey, wigeon, who are your lenders?

Sounds like they have pretty much given up making loans!

It does seem to be incredibly difficult for even the most creditworthy to get a mortgage these days.

I would agree, wait until your deal runs out and look elsewhere.

Northern Rock!! They were one of the best 2 year fixed rates last year (Dec 2010). As well as looking on their website and speaking direct to them I also just got our financial adviser to double-check (because it seemed rather odd) but he's called back this afternoon to say that they do only do personal loans rather than mortage extensions. It was nothing to do with our circumstances or credit rating, just their policy for anyone.

I am now looking at mumsnet kitchen threads - big mistake....

Wigeon - are you sure a kitchen extension would add to the value of your home?

Round my way (mildy poncey part of London) its about £60,000 to extend your kitchen 4-5ft sideways. People don't make their money back on it.

£60k! We are Herts and it should be less than half of that for 2.5m by 3m (the extension plus new kitchen). Actually, we are planning on staying her for at least 10 years (maybe much longer) so in some ways our quality of life is more important than medium-term resale value. Although I don't want to pour money down the drain. I did think of getting an estate agent round to get their thoughts (pretending we might sell in the medium-term) - good idea?

Ah, northern Rock, yes.

I believe they are not offering new loans as they are under pressure to pay back the loan from the Government. So definitely nothing personal!

I think their SVR is very uncompetitive as they are trying to get their customers to move their loans so make sure you are geared up for moving the loan as soon as your deal runs out.

Would say it would be a good idea to get an estate agent's opinion on the value of the work you want to do in the meantime.

Wigeon - definitely a good idea to get on to estate agent.

We are soooo close to extending our house but saw our dream house a month ago. Sadly it's just a tiny bit out of our price range, but we got the estate agent/surveyor to come round and value our house, in case we could have put together the £ to buy the dream house. While he was here, we asked for advice on the impact of the extension we are planning (small like yours). I thought it was best to be upfront - we would only move for a dream house, so if we weren't going to move, seemed reasonable to pump surveyor for opinions on the impact of our extension on house value.

Broadly speaking, I think he said that we'd not get the whole value of the extension back if we sold right away but the extra space and the new kitchen would make the house more easily saleable, and we could hope to get back around 75% of our expected £40K outlay. Like you, we're planning on staying put for some time - I want us to enjoy the extension/kitchen if we do it!

That's interesting bosch. Cantdecidewhattodo - that makes sense about Northern Rock. We are actually quite organised with sorting out new mortagage deals in time for the old one expiring and have already (mentally) pencilled in October 2011 to ring up the IFA chap! (although hopefully DC2 will have made an appearance in May 2011 so baby brain might take over...)

Right, will add estate agent on the list of things to do.

DH spent some of this evening mucking about on the Ikea kitchen planner - sooo dangerous! We can see how our lovely kitchen would look with the extension and it would be amazing! Any way of doing the whole thing for a couple of grand and some homemade cakes?!