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7 Mar 2019

Should you remortgage to release equity for home improvements?

Number of homeowners remortgaging to release equity increased by 12% in 2018

An increasing number of homeowners are borrowing additional cash when remortgaging, as they look to fund home improvements rather than step up the property ladder.

Homeowners are reluctant to move home due to a 'cool' property market and are instead focusing on adding value to their current homes,a report by Yorkshire Building Society has claimed.

But is it ever a good idea to increase your mortgage debt by releasing equity to fund renovation work?

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Homeowners remortgaging to fund improvements

If you have a repayment mortgage, your monthly payments will gradually pay off the loan over the term of the mortgage.

This means that, when you come to remortgage at the end of your introductory period (usually two or five years), you should be able to obtain a deal with a better rate, as you'll have paid off some of your loan and can remortgage at a lower loan-to-value (LTV) ratio.

Research by Yorkshire Building Society (YBS), however, claims that the percentage of homeowners borrowing more than their remaining balance at the point of remortgaging increased by 12% in 2018, with many borrowers looking to fund renovation work rather than move home in an uncertain property market.

Low mortgage rates could mean increased borrowing

Major home improvements, such as an extension or loft conversion, can add significant value to your property.

This kind of renovation work is traditionally paid for through savings or a personal loan, so why are borrowers now choosing to add debt to their mortgage instead?

The answer may well lie in low mortgage rates. Right now, it's possible to remortgage to a 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 close, with the cheapest rates on an 85% deal only 0.1%-0.2% more expensive than a 75% mortgage.

How much more will remortgaging cost me?

Imagine you're coming to the end of your fixed term and are wondering whether to fund that dream loft extension or man cave by borrowing more on your mortgage.

Let's say that you've got £150,000 left on your home loan, and your property is now worth £200,000. This means that, without any further borrowing, you'll be able to get a new mortgage at 75% LTV.

If you choose to borrow more to fund your renovation, however, you might need to obtain a mortgage at a higher LTV of 85% or 90%.

Below, we've looked at how increasing the loan amount could affect your monthly payments. We've based these calculations on the cheapest available initial rates and looked at the monthly cost during the deal period (of two or five years) only.

Two-year fixed-rate mortgages

As you can see in the table below, for each extra 'chunk' of £10,000 you add to your home loan, you'll be spending around £50 more each month (or £600 more each year).

By borrowing an extra £20,000, your repayments would go up by around £100 a month (or £1,200 a year) during the fixed period.Links take you to our reviews of each provider.

LTV (additional borrowing in brackets)LenderLowest initial rateRevert rateAPRCFeesMonthly cost (fixed period)
75% (£0)Yorkshire Building Society1.47%4.25%4.4%£1,495£598
80% (£10,000)HSBC1.64%4.19%3.9%£999£650
85% (£20,000)Leeds1.67%4.69%4.9%£1,999£694
90% (£30,000)Barclays1.79%4.24%3.9%£999£745

Source: Moneyfacts, 6 March.Monthly cost calculations based on a 25-year repayment mortgage.

Five-year fixed-rate mortgages

It's a similar case if you remortgage to a five-year fixed-rate deal, where borrowing an additional £20,000 would cost you around £90 more each month.

LTV (additional borrowing in brackets)LenderLowest initial rateRevert rateAPRCFeesMonthly cost (fixed period)
75% (£0)Barclays1.94%4.24%3.4%£999£631
80% (£10,000)Nottingham2%5.74%4.3%£999£678
85% (£20,000)M&S Bank2.04%4.19%3.4%£1,094£723
90% (£30,000)HSBC2.29%4.19%3.5%£999£789

Source: Moneyfacts. 6 March. Monthly cost calculations based on a 25-year repayment mortgage.

The dangers of increasing your borrowing

In the grand scheme of things, an extra £50 or £100 a month might not seem like a huge amount, but remember that this is being added to the total cost of your mortgage, which you could be paying for 25 years or more.

Remortgaging up to 95% LTV

Many lenders (including YBS) will allow you to remortgage up to 95% of the property's value, but this isn't always a good idea.

You might have read that 95% mortgages have dropped in cost, but the truth is that they still remain significantly more expensive than 85% or 90% deals.

And in a market where house prices are stagnating, a 95% deal can be risky, as a drop in values could leave you in negative equity(when you owe more on your mortgage than your home is worth).

Financing home improvements

Low mortgage rates have made the prospect of remortgaging upwards more attractive, but it's worth considering the alternative ways you could finance your home improvements before signing up to such a commitment.

Theoretically, you could get a personal loan of between £10,000 and £20,000 at a rate below 3% (though bear in mind that not everyone gets the advertised rates).

A £10,000 five-year personal loan at 3% would cost you around £180 a month, while a £20,000 loan over 10 years would cost around £195 a month.