Funding an extension - increasing mortgage or releasing equity?

[SheWouldNever]

Our mortgage advisor has told us that you aren't allowed to increase a mortgage for an extension, as lenders only calculate the mortgage based on the current property value rather than future value - is this true?

We were planning to borrow an additional amount on our mortgage to fund a two storey rear extension. We don't quite have enough equity to release to cover the build. It's for a house we are currently purchasing, if that makes a difference, rather than one we are already in, we have a mortgage with no early repayment fees and were planning to switch mortgage and borrow more once we complete on the house - our mortgage advisor has known this was our plan since day 1 so not sure why this is just coming up now. Quite confused at to how we are going to be able to fund the house extension at this stage!

So for argument's sake you want to buy a house for £200k. You have agreement for £150k mortgage, and have £50k deposit. You then want to borrow a further £75k to extend, which means the total borrowed will be more than the current value? Is that right?

You had assumed the value after extension would be say £275k, and so the bank would be happy to lend based on the future value being less that the total borrowed?

I'm afraid your broker is right. It is far too big a risk for a lender. They have no control over the quality of the extension, nor a crystal ball that will
Tell them how much value has been added.

Obviously people do extend their borrowing to fund extensions, but they can't borrow more than 90% the total current value of the house.

Could you do a single storey extension for the time being, assuming the equity calculations work, then do the top storey later?

We have done ours in stages. We bought the house with the full intention of extending, but waited for 5 years following the purchase - until it had increased substantially in value - to increase the mortgage to fund a loft conversion. This building work added quite a bit of extra value to the house. Two years later we have borrowed again to do a single storey kitchen extension. Once that’s finished we’ll stop extending! If we could have done it all at once at the time of purchase then we would have done, but it just wasn’t possible.

I don't think there is a way to do a single storey first and then first floor later without spending extra money - we'd have to tear half the first floor down again, or at least the roof above the kitchen, and I don't know how that works practically and financially.

We hadn't assumed anything regarding future house value against our borrowing. But we had assumed that because we were purchasing a house a fair bit under our affordability (600k instead of £750k) that we would be able to borrow the remaining amount to extend. We had this exact conversation many times with our broker, and he's only mentioning it now. It completely makes sense for the lenders, so I get why it is this way, just frustrating that it has only been brought to our attention at this stage.

The work we plan to do on the house will immediately be reflected in the updated house value. We also planned to convert the loft at a later stage, maybe 5 years down the track, as we can't afford to do all of it at once...although now it seems like we can't afford to do any of it. Certainly can't afford to wait years to do it in stages - we've got four kids and were buying a purposefully smaller house with the view to immediately renovate and extend it.

But the way you do that will then be putting on the minimum you can get away with as deposit and fund the extension with the money you have got. This is essentially similar to remortgaging and borrow more.

Yes, the mortgage broker is right.

If you have equity in your current house, you put less of that down as a deposit (and borrow more) - so say you're buying for £300k and putting say £80k down as a deposit, you take a 90% Mortgage for example (subject to getting one) so you put down £30k as a deposit, borrow £270k and then use the other £50k to fund the extension (albeit that wouldn't be enough for a 2 storey extension, but you get my point).

We did the same as a pp - purchased then didn't extend for 5 years, by which time we'd paid down the mortgage quite a bit and the value of the property had increased so much that we remortgaged to release the equity to fund the extension.

So, I guess the new plan is that we purchase the house with the current approved mortgage, then we remortgage for a higher LTV and release equity, and maybe get a loan to cover the rest. Repayments-wise it will be a more expensive way of doing it, but seems the only way. We have £230k equity. The build plus kitchen, bathroom and glazing will cost £150k give or take 10k or so. Don't think lenders are currently allowing higher LTV than 15%.

Then the rest of the house needs a complete refurb, rewire and replumb so we'd have to take a further 30k out of the equity / borrow on the mortgage if possible once the house value was reassessed... it doesn't sound likely to me. We can't wait to refurb the rest as the plumbing is ancient and new extension and kitchen will require a new boiler / heating system, so it all really needs to be done at once.

Currently feeling a bit silly for attempting to purchase a complete project house well under our budget with the assumption that we could borrow more to do the work. We've had so many conversations with our mortgage broker and also more experienced property buyer family members about our plan to do just this, and no one has brought this up until now.

Can't you just get apply for a new mortgage, rather than buy then reapply, and keep a bigger amount aside for the building work.

So buy for £600. Instead of putting £230 down as deposit, put down £100 and borrow £500. That's a reasonable LTV.

Could you borrow the money through a loan, rather than a mortgage? You wouldn't be able to get the full amount you need, but it would get you closer - and given that the mortgage is comfortably within your affordability, you shouldn't have any difficulty being approved for it.

There are limits on how quickly you can remortgage so as above, get a new mortgage - you refer to LTV of 15% but I think you mean 85%. If the purchase price is £600k, you put down 15% as the deposit (£90k) and get a mortgage for £510k. You've then got £140k to do the works.

If you need £180k all together, you'll only have to pay the builder in stages (the works will take 6-9months?) you use savings / maybe a loan, even a credit card (obviously not ideal) and then re-mortgage once the works are complete and the "new" value will have increased & will be used by the lender, and you'll get back to a better LTV.

Yes sorry @Africa2go I got my percentages the wrong way round. It would be 85% LTV. We’ve asked our broker to get us a new AIP with those figures. Not sure if it affects LTV calculations, but the lender has valued the house at £640k but our purchase price is £600k. Even releasing that £140k of equity, we’d still need a further £40k to guarantee all the work could be done, and I’m not certain where we would get that from. Could maybe scrape 10k from savings and would have to hope we’d get approved for a loan for the rest - I don’t know much about how that works or our eligibility. That’s the next thing to research.