Buy a new property or extend

[Kkaayy]

We are currently in a 3 bedroom house which is far too small for us now my children are older. They are both in tiny bedrooms and as I work from home I ideally need an office as currently using conservatory which isn’t ideal.

I can’t get my head around the finances with selling and extending. Our house is worth approximately £400,000 and we have approx £180,000 left on our mortgage. Does that mean if we sell for 400k, we’ll have 220k to put towards a new house? Probably looking in the region of 500-550k for the next size up so would we only need a mortgage for 280k?!

How does it work if we want to extend? How do we fund this? I’m not sure we would get the extra room we need if we extend but if it’s going to be much cheaper then I could settle.

We would definitely look to stay in the same town as we love the area.

If you buy a new house for say £500k and sell your old house for £400k then the price increase difference of £100k needs to be added to your equity of £220k which makes a £320k mortgage. If you buy a new house for the higher figure £550k that is an extra £50k to be added to the £320k making a new figure of £370k mortgage, All this is assuming you have spare cash for selling/buying costs and stamp duty. These costs could be added onto your mortgage thus increasing it above the £370k mortgage. I think,your stamp duty will be £17,500. So in reality you could end up with a £400k mortgage if you estimate costs of £30k to buy and sell.
As for the extension, you could increase your mortgage if you don’t have the savings to pay for it.

Think I have that correct.

@LindaDawn I think you’ve got a bit a
confused in your response there. The equity doesn’t increase the mortgage, it does the opposite, it reduces the amount you need to borrow towards a new house.

@Kkaayy Yes you’ve got that right. If you sell for £400k and the mortgage has £180k left then you have £220k of equity. So if buying a £500k house you’d need a mortgage of £280k plus your equity of £220k to make up the purchase cost. Don’t forget to take account of other costs too , estate agent fees, solicitors fees and the big one - stamp duty.

In terms of extending, you need to remortgage. If the house is worth £400k and you have £180k left owing , then you can potentially borrow up to £180k extra against the value of the house (£400k value minus 10% deposit minus the £180k you already owe). Subject to all the usual affordability checks by the mortgage company, and how much extra debt you want to get yourselves into.

You have 220k in equity which you can use as your deposit for new mortgage as long as you have all the other moving costs covered such as estate agent fees, legal fees, stamp duty and moving fees. If you don't have the cash to cover the other costs than you would need to take it out of your equity and would have a smaller deposit.

If you want to stay and extend you may be able to take out additional borrowing. You have to weigh it up in terms of how much it would cost to extend vs costs of moving. It comes down to personal choice really.

I’d look again at the cost of extending, because it doesn’t sound like that would even be a cheaper option for you.

If you can get a house suitable for your needs for £100k more than your current house, it would be much easier to do that than spend a year of your life disrupted by building works when a single storey extension will probably cost around £100-150k anyway.