I just bought a property with a 10% down payment. I want to add an extension to increase the space and value of the property. How could I go about taking this out of the equity I have in the property? Can I borrow 5% more? Or do I have to wait until I own more of the asset before borrowing against it?
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Gareth says …
It’s common for people to use the money they’ve accumulated on their property to pay for renovations, but that’s not the only solution. Remember, a mortgage is decades of debt, so any additional borrowing you take out stays with you for the life of your loan. What may seem like the obvious place to fund your project, could end up being the most expensive.
“Some elements to take into account”
Let’s take a closer look at what you have to offer. Since you have just purchased the property, what you are looking to do is increase your mortgage. Doing this with your existing lender is often called an “additional advance”. This allows you to borrow more money from your current lender over the life of your mortgage contract.
The rate will depend on what your lender is offering – sometimes it can be the same as your existing mortgage rate, but you might have to pay a higher rate, making it more expensive than your existing mortgage. .
The advantages here are that you don’t have to switch providers to get a loan, you can spread your repayments over a very long period of time, and even if the interest rate is higher than your mortgage, it is likely to fall. ‘be cheaper than what you would pay on an unsecured loan.
There are a few things to consider – the most important being whether your lender would actually give you an advance.
Lending to people with a 10% deposit is riskier for mortgage lenders, but borrowing an additional 5% of the value of your property would push it to the maximum that a bank or mortgage company is willing to lend.
She may not be willing to take that extra risk – some banks will only consider a new advance if you own at least 20% of the equity in your property. Some lenders offer a separate loan alongside your mortgage. It is worth understanding its terms before applying.
You will also need to consider affordability – will you be able to afford the increased monthly mortgage payments? And by tying the loan to your property, defaulting on repayment if you are having trouble could result in repossession of your home.
Since you have just purchased your property, re-mortgage with another lender before your term expires would incur prepayment charges which would make the cost of borrowing higher.
Prepayment charges are usually around 2% of the value of your loan, forcing you to find thousands of pounds just to borrow more.
I think your suggestion to wait until you have accumulated more equity is the most sensible course. When your current mortgage contract expires, you can remortgage to free up cash on your property.
If your property has gone up in value, the combination of that and any return of capital you made during the transaction will hopefully give you a lower LTV – say 15 or 20 percent.
Then you can remortgage up to 90% of the LTV, 85% covering your existing loan and an additional 5% to finance your renovations. I would suggest seeking independent mortgage advice to find a bank willing to lend you on these terms.
There is a risk here. Interest rates are at their lowest. There is no guarantee that the rates will be this low in two years – and you could end up with higher monthly repayments.
To put yourself in the best possible position for this, consider overpaying your mortgage. This will allow you to acquire more equity in the property, so that when you come to remortgage, you can do so at a much more attractive loan in relation to the value.
Who? posted a calculator – visit which.co.uk/overpayment