House prices: add room – and add value

By Rosie Murray-West
The right home improvement can pay for itself.
With the housing market in the doldrums, many more people are turning to home improvement as a way to get the space they need.

Figures from Nationwide last week showed that a record 20pc of all further advances given to its existing mortgage customers this July were used to pay for structural work, including loft conversions. What's more, 10pc of all remortgages that the company agreed were also for extensions of one kind or another.

"In uncertain economic times, home owners are attracted to the idea of improving their property by adding space and value rather than face the extra costs and expense of moving to somewhere bigger," said Nationwide's head of mortgages, Martin Dyson.

Getting extra funds for home improvement projects used to be a piece of cake. However, with lenders now being stricter about loan-to-value ratios and who they will lend to, how do you go about getting the money to make home improvements?

Do your maths first

Loft conversions and extensions aren't cheap, but are likely to add value to your home. According to the Nationwide index, another double bedroom will push up the value of your house by 12pc, while a double bedroom and en suite bathroom adds 23pc. However, this would cost you around £35,000, which isn't money that many of us have hanging around.

Start by looking at how much your loan-to-value is likely to be, as well as calling some builders for a general estimate of what the work will cost. You can usually call your mortgage company to get the figure for the balance remaining on your mortgage, in order to work out what your current loan-to-value is.

Talk to your current lender

Many mortgage lenders offer extra borrowing to those who are carrying out building works. David Hollingworth, from mortgage broker London & Country, said that most lenders will find building works the "most acceptable" reason to lend money against someone's property.
Many lenders offer special deals to those borrowing extra money, which often come with low, or no, arrangement fees. Halifax, for example, allows existing borrowers to borrow up to 80pc of the value of their home. Essentially you would end up with two mortgage rates – the mortgage rate you already have and the extra on a different (probably higher) rate.
Talking to your lender is the easiest way to find out what deals are available and what the threshold is likely to be. Don't assume, however, that your mortgage company will take the new value of your home into account when deciding how much to lend you – most mortgage companies will only lend on the current value of your home.
However, Nationwide confirmed that it will occasionally consider lending more to those who have plans to increase the value of their home, which would require a separate extra valuation.

Consider other options

If you are at the end of your mortgage deal, it may be worth considering financing your home improvement with a credit card or short-term loan, with a view to remortgaging once the property is complete. This is a risky strategy, since it relies upon you being able to get good mortgage finance after the extension is complete, but you may end up paying less in the long run.
An example of this would be if you had a house worth £300,000 and wanted to put on a loft conversion costing £30,000. If this increased the value of your property by 20pc, you could end up with a lower loan-to-value by borrowing £30,000 on credit cards or using loans and then remortgaging completely at the end of the work. That way, you can guarantee that the valuer will take the work you have done into account when deciding the loan-to-value of your mortgage, and you may get a lower rate.
If you are considering this strategy, make sure that there are no problems with your credit history and be very careful about how much value your project will add. Otherwise you could be left with a big problem at the end of the project.