Remortgaging to make improvements to your home is a top reason for seeking more money from the equity in your home. There are also of lenders who will consider this situation. In this article, we will take a look at the most common situations and how remortgaging would work.
For any of these, there are a few principles that remain the same. These factors influence any type of mortgage that you consider and include:
- Equity in the home
- Your credit history
- The type of property
- Personal circumstances
Home improvement loan versus remortgaging
You don’t have to remortgage your home to get money to do some work on it. In some situations, a home improvement loan might be a better option. There are three main ways to raise money for improvements:
- Remortgage – release some of the equity in your home by increasing your mortgage
- Secured loan – take a loan against your property but separate from your mortgage
- Unsecured loan – any loan not secured against your property or other assets
If you have equity in the home, then remortgaging would work out the most economical way to raise money. You should always be careful about securing debt against your property and work with mortgage advisors to examine if this is the right option. Let’s look at the options in light of raising money for home improvements.
Remortgaging to pay for home improvements
Mortgage brokers are often asked if people can remortgaging to pay for home improvements and the general answer is yes, you can. As long as you have some equity in your home and can show you can afford the new repayments, there’s no reason why you can’t.
First, you need to think about the type of improvements you want to make. Is it to decorate the property or do you need a new kitchen or bathroom? Are you looking to add extra space with an extension or a conservatory? Or maybe convert the loft?
Once you know what you want to do you can start to look at the possible remortgaging situation.
Your home is worth £35K and your mortgage is for £175K. You want to raise £25K to add a new kitchen, remove a wall and decorate. You could switch to a new mortgage for £200K which gives you the funds you need.
Most people tend to remortgage before the work starts in order to have some money to pay deposits. However, if you can deposit to get started, you can wait until the work is being carried out or even is complete because this will raise the value of the property. This might mean you can borrow more money or open up more products due to a better loan to value ratio.
Remortgaging for an extension
Let’s say you want to add a standard 4m x 5m single-storey extension to your property. These usually cost less than £30K and a double storey is around £50K. This means that remortgaging to raise this money is often the best option.
Under the new Permitted Development rights, you can usually do this without planning permission although there are some rules to follow for this. And always you need to remember building regulations. This is important if you come to sell the house as you will need to be able to show a surveyor that everything has been done correctly.
Remortgaging for a house renovation
If your home needs some renovation work, you can often raise the money from a remortgage. There are two categories of this type of work – the first is where the home is habitable but needs modernising while the second is where it is not considered habitable until work is done.
The basic requirements for habitability are usually a usable kitchen and bathroom and a watertight roof. To renovate the property, whether it is habitable is often a consideration. But there are lenders who will consider both situations.
The work done might also be a factor. For example, if there are serious problems like below standard electrics, the mortgage company may agree to the mortgage but deduct the amount required to deal with the problem from the initial advance. Once the problem is fixed, you can receive the rest of the money.
Renovations projects can take a long time, and this might mean the mortgage ends while work is still going on. This is where remortgaging might have to take place while the house isn’t fully habitable. Or you might want to wait until after the work is done if possible as the house will be worth more once the renovations have finished.
Remortgaging for loft conversions
A loft conversion can be a great way to add extra space without extending the property. Conversions can start from around £15K with a dormer loft conversion with a double bedroom and en suite costing from £35-45K. There’s no limit to what you can spend but you always want to remember the increase in property value if you ever plan to sell it.
Often people remortgage for a loft conversion because there is a lower interest rate on the remortgage than on loans. The work could add around 20% to the value of the property so if you can fund the project and then look at a remortgage afterwards, you could potentially borrow more as the value of the house would have increased.
Main considerations for remortgaging
There are some main considerations that mortgage lenders will use to help decide if to give you the loan or not. Here are a few to be aware of.
Equity in the property
How much equity you have plays a big part in how much you can borrow. For example, if your property is worth £300K and your mortgage is for £200K then you have £100K equity. This would mean you currently have a 66% loan to value (LTV) ratio. Lenders look at this when deciding how much you can borrow.
In most cases, the very highest amount of LTV is 95% but if you are looking at a lower LTV, there are more lenders available or might offer a lower interest rate. With this example, you could borrow up to a remortgage amount of £285K which would give you £85K to use on improvements. But there are other factors that come into whether the lender will give you this amount.
Another big part of the mortgage decision is affordability and lenders each have their own criteria to consider this. It involves looking at your incomings and outgoings each month to see how much you have available.
A standard approach is to take how much you earn and times it by a certain amount. Many lenders you 3-4 times your income while others will go up to as high as 6 times your income. Some lenders will consider things like bonuses, overtime and investment income in full, some will only consider half while others won’t consider it at all.
Secured loans can often allow a greater LTV than a remortgage but you will pay higher interest charges for this.
Lender 1 allows 50% of your bonus and 4 times income:
- £15,000 x 50% = £7,500
- £25,000 + £7,500 = £32,500
- £32,500 x 4 = £130,000 max loan
Lender 2 allows 100% of your bonus and 5 times income:
- £15,000 x 100% = £15,000
- £25,000 + £15,000 = £40,000
- £40,000 x 5 = £200,000 max loan
Secured loan lender allows 100% of your bonus and 8 times income:
- £15,000 x 100% = £15,000
- £25,000 + £15,000 = £40,000
- £40,000 x 8 = £320,000 max loan
So in these situations, you could borrow anywhere from £130K to £320K on the same basic information depending on the different criteria of the lender. That’s why working with a mortgage broker is ideal as they work with a whole range of mortgage providers.
Can you remortgage for renovations when self-employed?
When you are self-employed, it was once more difficult to get a mortgage or to remortgage your home, but lenders are a lot more versatile now. Some lenders will be able to offer a mortgage for people who have been self-employed for just a year or even less depending on the situation.
How you draw your income is also influential for lenders. Some lenders will look at your salary and dividends from the company while others also look at remuneration for private health insurance and home office allowances. Some lenders also look at the retained net profit for affordability calculations which can make a big difference to how much you can borrow.
If you are the director and 50% shareholder in a limited company that makes a £300K annual profit but you only have a salary of £12K and dividends of £40K then some lenders might consider these two figures for your income:
£12,000 + £40,000 = £52,000 x 5 = £260,000
However, if a lender considers the profit retained in the business and gives 4 times income you could find:
£300,000 x 50% = £150,000 x 4 = £600,000
For all the second lender uses only 4 times the income, because they use the whole retained profit, you can borrow a lot more than from the first lender, even a 5 times your income.
Remortgaging for renovations as a contractor
Like being self-employed, being a contractor once meant it was hard to get mortgages, but this has changed. Some lenders will consider new contractors if they have experience in the industry as an employee. Some will consider if you have fixed contracts or they have been renewed at least once. Others will look at the minimum time remaining on the contract.
How much you can borrow is generally worked out based on your day rate and then times by 46 weeks to accommodate holidays and time between jobs.
- Day rate £300 = weekly rate on 5 days £1500
- £1500 x 46 weeks = £69,000
Some lenders also give special consideration for those on the CIS scheme with gross income payslips used rather than self-assessment returns.
How loans and credit cards factor in
If you have unsecured debts such as loans or credit cards, this can reduce how much you can borrow for remortgaging. Lenders will use them as part of your affordability checks to look at outgoing commitments.
If you earn £30K a year and have loan commitments of £300 a month, then your annual commitment for these is £3,600. Lenders will take this off your annual income so they will only consider £26,400. If they went up to 5 times this income, you would be able to lend up to £132,000. But if you paid off those debts before applying then they could use five times the whole income which would mean borrowing £150,000.
Being in a new job
Starting a new job doesn’t always mean you can’t remortgage for renovations. Lenders may consider if you are still in your probationary period or are within 3 months of the start of the new job. Others might ask for at least 12 months employment. If you are changing a job, then your lender may want to see that you have a job offer in place before committing.
Remortgaging for improvement on a Buy to Let property
You can also remortgage a buy to let property in order to make renovations although the lenders will look at the rental income you will be able to achieve with the work when making a decision. Affordability models are different in these situations, but the basic rate taxpayer must have 125% of the mortgage covered by rental income. This increases for higher taxpayer bands. This could also change in the near future with new regulations coming into force.
- Buy to let mortgage balance £100K
- Interest 5.5%
- Monthly interest payment £458
This means rental income would need to be £573 on basic rate, £664 on the higher rate and £733 on top rate taxpayer percentages.
If the rental income isn’t enough then the maximum loan available will reduce to match. So if rental income is £650 per month and you are on the higher taxpayer rate, you could only be able to borrow up to the interest payment of £406 high means a maximum loan of £88,500. There are a few exceptions, however.
This is where a landlord uses earned personal income to top up the affordability on a Buy to Let property. In this example, if the landlord wanted to borrow £100K, he could take the difference in income requirement on as a commitment against their personal income earned on their employment in order to get this.
If you own four or more properties that are Buy to Let, you are considered a portfolio landlord according to regulations. Lenders will need to make additional checks into your entire finances to make sure you aren’t overstretched.
Remortgaging for renovations with bad credit
Lenders are available who will consider a range of different bad credit situations now and often you can borrow up to 90% LTV. The lender and amount you can borrow will often depend on the nature of the problems you have had.
Defaults & CCJs
Defaults involve consecutive missed payments while a CCJ is a county court judgement when you have failed to repay a debt. Some lenders will consider these situations when they have not been paid off or satisfied, some even when they are within 3-6 months. It depends on how many and what the situation was.
Late payments and arrears
Again, lenders will consider you if you have late payments or arrears on your records for secured or unsecured debts. They generally consider debts on unsecured loans as less serious than those on secured loans. Considerations will be when the payments happened and what the situation was for. Some companies may want 12 months clear record to consider you.
IVAs and bankruptcy
Some lenders will consider IVAs and others will consider bankruptcy when it has been discharged for 12 months or more.
Debt management plans
Debt management plans are where you set up a voluntary scheme to pay for your debts and is often viewed favourably compared to other bad credit paths by lenders because you are paying off your debts. So there are companies would consider it.
The property itself can play a part with the lender and who will consider your remortgage. For standard construction properties such as terraced, semi or detached houses and purpose-built flats, there are usually plenty of lenders to consider it. Ex-council properties and unusual construction houses might be more difficult. But this isn’t impossible – there are mortgages out there on windmills, barn conversions and eco-friendly properties!
In these situations, lenders often want to see the appeal for other buyers and that the property would be easy to sell if this was needed. If you are renovating one of these properties, it is also important to have the right planning permission and amenities in place.
Mortgages are also available for semi-commercial properties. Examples of these can be a shop on the ground floor and a flat above and can make good conversion opportunities. Specialist mortgages are offered for these type of property.
There are two main situations in your personal circumstances play a part in the mortgage process – your age and convictions.
With age, you need to be at least 18 to get a mortgage and some companies stop at certain upper age limits. But others will go well into retirement or have no upper limit at all. Most will look at affordability and how you will pay for the mortgage once you are retired.
With convictions, you don’t have to declare any spent convictions, but you will need to tell lenders about unspent ones. There are still lenders who will consider you, depending on what the conviction was for.
Other factors to consider
When you remortgage, remember there is a chance you will have an early repayment charge to pay when you end your current mortgage. Factor this in to make sure it is still worth it to remortgage once your current lender tells you what this is.
Building a house
If you have the equity, it may be possible to remortgage to build a new house or to use as a deposit and get a loan to help with building costs. The type of loan often depends on the type of property or if it is a commercial venture and deposits would usually be 15-20%.
Self-build mortgages are specialist products designed for you when you are building a new home. Funding is released in stages to pay for the different parts of the build and lenders offer these mortgages with different considerations to other types.
Mortgages to build commercial properties again need to be with a specialist. Examples include houses to rent out or a block of flats. There are lots of lenders who specialise in this area and you can also look at development finance loans for £1 million or more.
You can also convert houses into commercial properties or flats to rent out. You may want to look at splitting the title in these situations if you plan to live in part of the new property and the rest would be for commercial purposes.