An increasing quantity of homeowners are borrowing additional cash when remortgaging, as they turn to fund small remodels rather than step up the home ladder.
Homeowners are unwilling to move home due to a ‘cool’ property market and therefore are instead focusing on adding value for their current homes, a report by Yorkshire Building Society has claimed.
But is it ever smart to improve your mortgage debt by releasing equity to finance renovation work?
Homeowners remortgaging to finance improvements
If you've got a repayment mortgage, your monthly obligations will gradually remove the loan within the term of the mortgage.
This implies that, when you come to remortgage after your introductory period (usually two or five years), you should be able to obtain a deal with a much better rate, as you’ll have paid off some of your loan and can remortgage in a lower loan-to-value (LTV) ratio.
Research by Yorkshire Building Society (YBS), however, claims that the number of homeowners borrowing a lot more than their remaining balance in the reason for remortgaging increased by 12% in 2022, with lots of borrowers looking to fund renovation work rather than move home within an uncertain property market.
Low home loan rates could mean increased borrowing
Major small remodels, such as extra time or loft conversion, can also add significant value for your property.
This kind of renovation work is traditionally paid for through savings or perhaps a personal loan, why are borrowers now deciding to add debt to their mortgage instead?
The answer may well lie in low mortgage rates. At this time, it’s possible to remortgage to some two-year fixed-rate deal with an initial rate below 2%, even at 90% LTV.
And there are signs that the gap in cost between LTV levels is continuing to shut, with the cheapest rates on an 85% deal only 0.1%-0.2% more expensive than the usual 75% mortgage.
How much more will remortgaging require me to pay?
Imagine you’re coming to the end of your fixed term and therefore are wondering whether to fund that dream loft extension or man cave by borrowing more on your mortgage.
Let’s state that you’ve got lb150,000 left on your mortgage loan, as well as your rentals are now worth lb200,000. This means that, with no further borrowing, you’ll be able to get a brand new mortgage at 75% LTV.
If you choose to borrow more to fund your renovation, however, you might need to acquire a mortgage at a higher LTV of 85% or 90%.
Below, we’ve looked at how enhancing the loan amount could affect your monthly obligations. We’ve based these calculations on the cheapest available initial rates and checked out the monthly cost during the deal period (of two or five years) only.
Two-year fixed-rate mortgages
As you can observe in the table below, for each extra ‘chunk’ of lb10,000 you add to your house loan, you’ll be spending around lb50 more each month (or lb600 more each year).
By borrowing an extra lb20,000, your repayments would go up by around lb100 per month (or lb1,200 a year) throughout the fixed period. Links get you to the reviews of each provider.
| LTV (additional borrowing in brackets) | Lender | Lowest initial rate | Revert rate | APRC | Fees | Monthly cost (fixed period) |
| 75% (lb0) | Yorkshire Building Society | 1.47% | 4.25% | 4.4% | lb1,495 | lb598 |
| 80% (lb10,000) | HSBC | 1.64% | 4.19% | 3.9% | lb999 | lb650 |
| 85% (lb20,000) | Leeds | 1.67% | 4.69% | 4.9% | lb1,999 | lb694 |
| 90% (lb30,000) | Barclays | 1.79% | 4.24% | 3.9% | lb999 | lb745 |
Five-year fixed-rate mortgages
It’s an identical case if you remortgage to some five-year fixed-rate deal, where borrowing one more lb20,000 would set you back around lb90 more every month.
| LTV (additional borrowing in brackets) | Lender | Lowest initial rate | Revert rate | APRC | Fees | Monthly cost (fixed period) |
| 75% (lb0) | Barclays | 1.94% | 4.24% | 3.4% | lb999 | lb631 |
| 80% (lb10,000) | Nottingham | 2% | 5.74% | 4.3% | lb999 | lb678 |
| 85% (lb20,000) | M&S Bank | 2.04% | 4.19% | 3.4% | lb1,094 | lb723 |
| 90% (lb30,000) | HSBC | 2.29% | 4.19% | 3.5% | lb999 | lb789 |
The risks of upping your borrowing
In the grand general scheme of things, an extra lb50 or lb100 a month may not seem like a huge amount, but remember that this is being added to the all inclusive costs of your mortgage, for you to pay for 25 years or even more.
Remortgaging up to 95% LTV
Many lenders (including YBS) will allow you to remortgage as much as 95% from the property’s value, however this isn’t usually a good idea.
You might have read that 95% mortgages have dropped in cost, but the truth is that they still remain much more expensive than 85% or 90% deals.
And in a market where housing prices are stagnating, a 95% deal can be dangerous, as a stop by values could make you in negative equity (when you owe more about your mortgage than your house is worth).
Financing home improvements
Low home loan rates make the prospect of remortgaging upwards more attractive, but it’s worth taking into consideration the choice ways you can finance your house improvements prior to signing up to such a commitment.
Theoretically, you could get a personal loan which is between lb10,000 and lb20,000 for a price below 3% (though bear in mind that not everybody has got the advertised rates).
A lb10,000 five-year personal loan at 3% would set you back around lb180 a month, while a lb20,000 loan over Ten years would cost around lb195 a month.
