Should I Remortgage Before or After Renovating my Home?
Much of the time, the remortgages happens before the home improvements take place, and the capital released is used to pay for the work.
You can also pay for the work upfront if you have the funds available, and remortgaging, once the project is completed, can also be an attractive option for financing house renovations.
Depending on what changes you make, home improvements are likely to increase the value of your property - and therefore, grow the equity you own in your home. If you remortgage after the work, you can borrow at a lower LTV if the property is now worth more, and find more favorable rates and terms than you might be currently paying.
The property market is always prone to fluctuations, so there isn't ever a guarantee that paying for renovations will increase your property value. Therefore, remortgaging afterward can be a little uncertain as if the market has dipped in the meantime, your home might not have changed in value.
How Can I Remortgage to Pay for Renovations?
If you have equity in your property - i.e. your home is worth more than you owe on your mortgage, then a remortgage is usually a straightforward process.
You need to know what changes you want to make and work out what they will cost. For example, building an extension or replacing the roof is likely to be more expensive, and require more borrowing, than a new kitchen or bathroom.
Illustration:
- You own a property worth £350,000 and have a mortgage of £175,000.
- The improvements will cost £25,000 to remove an interior wall and fit a new kitchen.
- If you switch to a new mortgage for £200,000, you can pay off your existing mortgage balance and have the extra cash to pay for the building work.
Can I Remortgage to Build an Extension?
You can - provided you have enough equity in your property to cover the cost of the building work.
An average single-story extension will cost £30,000 plus, and more considerable extensions can cost upwards of £50,000, so these bigger projects are often the reason for a remortgage.
If the extension is considered permitted development (i.e. it falls within planning permission criteria that do not require the time and expense of a formal planning permission application), you can remortgage and start work reasonably quickly. However, you will need to ensure you understand the applicable Building Control regs before you get started.
Regulations and permissions matter because you will need to evidence this if you come to sell the property.
Should you have the funds to pay for an extension outright, you can still consider remortgaging once the building work has finished and always consider the debt-to-income ratio and your credit rating.
If the property has grown in value, you will own more equity, and can often find a more competitive rate through remortgaging.
Can I Remortgage for a Complete House Renovation?
You can - remortgages can finance small improvements and extensive renovation mortgage projects. Usually, this sort of work falls into one of two definitions:
- Modernizing or upgrading a habitable home.
- Renovating a dilapidated, uninhabitable property.
To be considered habitable, a property needs to meet specific minimum standards such as having a watertight roof, and a bathroom and kitchen.
Uninhabitable properties are usually best mortgaged by specialist lenders, as mainstream providers may be unable to lend against this sort of renovation project.
The complication is in the valuation process, as it is much more likely in an uninhabitable property that there will be serious issues, such as parts of the wiring, not meeting regulations. Lenders can set a retention clause, whereby they limit the amount of lending by the value needed to repair the issue.
Once the work has been completed to ensure the property meets minimum standards, they release the balance to you.
Full renovations can take years, and you can also remortgage if the lending term ends and the build isn't complete.
This can be a lucrative option as if half of the work is finished, you might be able to finance at a lower rate with a higher valued property.
Can I Remortgage to Convert my Loft?
Loft conversions or attic conversions are a popular choice, and many UK homes have space that can be utilised relatively cheaply.
The typical loft conversion costs from around £15,000, with adding bathrooms or dormer windows increasing the budget to anywhere from £35,000 to £45,000 - of course, the budget is crucial as it dictates how much you need to borrow, and therefore how much equity you realistically need to own.
You can remortgage before a loft conversion, and use the cash raised to pay for the work. Mortgage lending is usually the cheapest way to borrow the finances needed.
However, loft conversions can add around 20% to your property's value, and so remortgaging afterwards can be a great idea to reduce your mortgage interest rates.
If you have converted your loft and would like to compare potential remortgage rates on your property, give the Revolution Brokers team a call on 0330 304 3040.
Factors to Consider when Remortgaging for Home Improvements
There are several key factors to think about when considering remortgaging options to improve your property.
Equity in Your Property
The equity you have will determine how much you can borrow. You can work out your equity by taking the balance of your mortgage from the market value of your home.
Illustration
- You own a property worth £300,000 and owe £200,000 on your mortgage.
- The equity you own is worth £100,000.
- Your LTV (Loan to Value) ratio is 66.6% - this is how much you owe in relation to how much you own.
- It is worth knowing the LTV, and what LTV you'd be borrowing at, to increase your mortgage to include your home improvement budget, as lenders have caps on the LTV they can lend up to.
In a nutshell, the higher the LTV, the higher the risk and the higher the interest rates you are likely to pay.
Many lenders will offer up to 95% LTV, but if you can borrow a lower percentage than this, your rates will be more competitive.
An example at 95% Loan to Value Ratio
In this example, you have £100,000 equity and currently have a mortgage at 66.6% LTV.
You could borrow up to 95% LTV, which would be a total mortgage or loan balance of £285,000. With that cash, you can repay the £200,000 owed on your current mortgage and have £85,000 capital to pay for your renovation.
Other factors will impact the LTV you can borrow at, such as:
- Your age.
- The type of property.
- Your credit history.
- The reason for the remortgage.
Affordability Criteria
Affordability calculations are essential, as mortgage lenders need to check that you can afford to keep up with your monthly repayments.
Every lender has a different calculation basis. Some will lend three to four times your annual income for a home improvement remortgage. Specialist lenders available through a broker can lend as high as six times your income.
It's also worth considering that lenders take a different stance on including 'non-standard' income in that calculation - things like bonuses, commissions or returns on investments.
Niche lenders will happily include 100% of any additional income in deciding the maximum they can lend. Others will include 50% of your extra income, whereas some lenders will not include it at all.
If you need to borrow a higher multiple of your annual income or have a diverse income structure, give the Revolution Brokers team a call, and we will recommend the best lenders to apply to given your financial circumstances.
Illustration
You earn £25,000 per year, plus a bonus of £15,000. Here we'll look at different theoretical lenders, and the maximum you could borrow depending on their calculation policy.
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Calculation basis
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Lender A: Includes salary & 50% of your bonus
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Lender B: Includes salary & 100% of your bonus
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Three x annual income
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Max £97,500
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Max £120,000
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Four x annual income
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Max £130,000
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Max £160,000
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Five x annual income
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Max £162,000
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Max £200,000
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As an alternative, you could decide on a secured personal loan rather than a remortgage or unsecured loans. In some cases you could use an unsecured personal loan depending on the sums required to pay for the renovations. The unsecured loan can be used to cover smaller costs associated with renovating. The income multiple is usually higher, but the same variances between income calculations apply.
In this illustration, you can see how the same applicant could be offered from £97,500 to £200,000, so it is essential to work with a mortgage broker who can point you in the right direction to secure the remortgage finances you need.
Your Type of Employment
Can I Remortgage as a Self-Employed Person?
You can - and a growing number of lenders cater to self-employed homeowners, even if they only have one year of trading history.
If you are newly self-employed and are approaching the end of your first year, some specialist lenders can still make a remortgage offer.
As with employed applicants, the calculations differ between lenders, so you can find significant differences in the maximum mortgage lending they can offer.
Self-employed people might include income such as:
- Employee benefits.
- Vehicle allowances.
- Payments for the use of your home office.
- Net profits retained in the business.
Illustration
You own 50% of a limited company and earn a £12,000 salary per year as a director. The business makes a net profit of £300,000, and you draw a £40,000 dividend, leaving the rest of the profit in the company.
- Lender A includes only your salary and dividend in their income calculations and lends up to five times your annual income. They offer a maximum mortgage of £260,000.
- Lender B includes your share of retained net profits and lends up to four times your annual income. They offer a maximum mortgage of £600,000.
Can I Remortgage as a Contractor?
You can - and again, lenders all have their own policies. Some will:
- Lend to contractors with experience in the sector.
- Require a minimum trading period.
- Lend to contractors on fixed-term contracts who can prove at least one previous renewal.
- Require a minimum period to remain on your contract.
Income calculations usually take your day rate, multiply that by five days per week, and use 46 weeks as the estimate of the typical number of weeks worked per year.
Illustration
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Contractor Day Rate
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Contractor Weekly Rate
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Annual Average Income
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£150
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£750
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£34,500
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£300
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£1,500
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£69,000
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|
£500
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£2,500
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£115,000
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There are specialist lenders who work with applicants in the Construction Industry Scheme. These renovation mortgages consider your gross pay value, rather than relying on the net profit declared on your self-assessment tax return or business accounts.
Can I Remortgage my Home if I am in a New Job Placement?
You can - mainstream lenders will usually require you to have at least one year of employment history.
However, broker-only lenders can consider:
- Applicants in your probationary period.
- People not yet in work, but with a new contract that starts in the next three months.
How Does my Other Borrowing Impact my Remortgage Application?
Other debts, such as personal loans or credit cards, usually reduce the maximum you can borrow. That is because lenders will calculate your outgoings and existing liabilities, and deduct these from your annual income before working through the affordability calculations.
If you can reduce the amount you owe before applying for a remortgage, you will usually be able to borrow more.
Illustration
- You earn £30,000 a year and pay loan repayments and credit card repayments of £300 per month.
Below we have shown how different lenders might include those £3,600 of debt repayments in their calculations, based on offering five times your annual income.
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Annual salary
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Monthly expenses
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Annual debt repayments
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Net annual income
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Maximum mortgage value
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£30,000
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£300
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£3,600
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£26,400
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£132,000
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£30,000
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£0
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£0
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£30,000
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£150,000
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As you can see, repaying £3,600 of credit card debt might enable you to borrow £18,000 more on your remortgage to renovate your property.
Can I Remortgage a BTL Rental Property?
Yes, you can release equity from an investment property to raise the cash for home improvement loan.
Calculations for maximum borrowing differ, as they consider the rental income of the renovation property rather than your personal income as the primary criteria.
Your tax band also matters - the thresholds for most lenders are that, if the mortgage were charged at a 'stress test rate' of 5.5%, if you pay basic rate tax, the rental income must cover 125% of the mortgage payments.
Higher rate and top-rate taxpayers need to demonstrate rental income of 145% or 160% mortgage payment coverage.
Illustration
- You want a buy-to-let remortgage of £100,000
- The stress test interest rate is 5.5%
- Monthly payments will be £458
Lenders will require the minimum monthly rent to be:
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Taxpayer basis
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Minimum monthly rental income
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Basic rate - 125%
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£573
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Higher rate - 145%
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£664
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Top rate - 160%
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£733
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|
|
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Can I Remortgage if I Have an Adverse Credit History?
Lots of people run into credit problems, and you can remortgage even as high as 90% LTV if you have a poor credit history.
The right lenders to apply to depend on what sort of credit issues you have experienced, and when.
Bad credit lenders usually only deal with mortgage advisors or brokers, so it is strongly recommended that you work with a professional who can source the right remortgage for you.
Revolution works with a nationwide network of niche lenders who offer remortgages in bad credit scenarios. Contact us if you fall into this category to discuss your home improvement remortgage options!
Other Eligibility Criteria when Remortgaging
Type of Property
Standard properties built from bricks and mortars are easiest to remortgage. If you have any of the below properties, you will need to work with a specialist lender:
- Studio flat
- Ex-council home
- High-rise apartment
- A non-standard building made from timber, concrete, or with a thatched roof
You can also find lenders through a broker who will remortgage for renovations on unusual properties, such as:
- Repurposed windmills
- Eco-friendly properties
- Barn conversions
In these scenarios, the lender will need to ensure the property has resale potential, and that you can keep up with the repayments.
Planning permissions are crucial in an unusual property renovation, and even more so in listed buildings. If you complete a successful renovation and have the requisite approvals and certificates, you can add as much as 40% to the value of your property.
Age of the Applicant
Most UK remortgage lenders will lend to applicants aged 18 and above.
Some have a cap on the maximum age they will lend to, but many do not have a limit.
If you can prove affordability, regardless of whether you are working or retired, there is a suitable remortgage out there for you.
Any Unspent Convictions
If you have a conviction that is spent, under the terms of the Rehabilitation of Offenders Act 1974, you don't need to declare these, and they will not impact your remortgage application.
If you have unspent convictions, it is vital to work with a broker who can negotiate your application on your behalf.
Early Repayment Penalties on Existing Mortgage Lending
Should you have early repayment penalties on your mortgage, you might be reluctant to remortgage to finance home improvements since paying it off early will cost you more.
You can wait until the early repayment period has passed, or decide to accept those costs if you wish to move forward quickly.
Can I Remortgage to Build a New Property?
Potentially yes - provided you have enough equity in your existing property, you can raise capital through a remortgage to finance a new build project.
If the equity isn't high enough to cover the full cost of the build, you can still use this option to raise a deposit.
Loans for new-builds depend on whether it is a single residential property or a more commercial development. Typically, you will need a deposit of 15-20%.
For commercial developments such as converting office buildings into flats, or building a new housing development, the more suitable form of lending is development finance.
Development finance usually applies to projects costing £1,000,000 and above, although you can borrow less by working with a broker.
Whether you wish to remortgage to carry out some home improvements, or would like to see what sort of remortgage options are on the market following a renovation, give the Revolution team a call.
As an independent, whole-of-market broker, we will advise on the best lending, and the most competitive terms, for your financing requirements. Call on 0330 304 3040 or send us a message to [email protected].
