Is it better to extend or move? What are my options?

Mortgage expert, Sue Ellis, on the financial options available to property owners when you're thinking of extending your home

"My wife & I moved into our property a while ago and have been thinking about the possibility of extending as we need more space with our growing family but can’t really afford to move at present. What are our options?"

As a mortgage broker I have helped numerous clients raise money to carry out home improvements, the purchase of another property to be let or used as a holiday home, to consolidate debts or to buy a new car, for example. Generally lenders are prepared to consider further borrowing for most legal purposes with the exception of funding gambling, or the purchase of a timeshare property. That said, some are more generous than others in what they will consider, so it is a case of researching the market to see who offers the most competitive deal given the reason for the borrowing. In any case, the proposed increase will be assessed in the same way as a mortgage - the lender will want to ensure that the monthly payment is affordable by seeing evidence of your income as well as a breakdown of your monthly outgoings and other liabilities and that you have sufficient equity in the property to allow this additional borrowing. Do bear in mind any lending will be based on the current value of the property, not after any improvements you plan to make. 

Firstly check whether you are still tied in to your current mortgage deal with an early repayment charge. Make this company your first port of call to see if they are prepared to lend the additional amount. If not, then the mortgage market as a whole should be reviewed to find the best deal based on your circumstances but some early repayment charges can be prohibitively expensive in which case it might be better to port the mortgage to a larger property. This at least liberates you from the inconvenience and mess and it’s worth remembering that extending your home may not be reflected in the price you sell for if the market suffers a downturn or the property becomes too big for the general location. There is wisdom in choosing ‘worst house, best location’ as it enables good uplift in simple improvements. By the same token it’s dangerous to have the most expensive house in the street without a great plot / location so be wary of spending lots of money on a top-heavy loft extension, for example, without sufficient room to balance out the living space.

If a standard first charge mortgage is not available for whatever reason, then another route to explore is to borrow through a ‘second charge’ lender. These second-charge providers are prepared to lend with their security ranking behind that of the principal lender but rates and fees are likely to be higher because of the additional risk to them should there be a default on payments with the property. If the property is re-possessed and insufficient equity is available, either because property values having fallen or the mortgage balance has been increasing due to arrears, they will lose out to the principal lender. However, second charge lenders can be useful is if you have an unbeatable deal with your current lender. A good example of this is historic ‘tracker’ mortgages that were around at the end of the last decade. These followed the Bank Base Rate but were priced to be below this rather than above, as current deals are priced. As such it would be sensible to take out a second charge rather than lose such a beneficial deal.

Of course, everything must be properly researched to ascertain the best overall choice, with all fees and costs taken into account along with the circumstances of the borrower. As a rule of thumb, borrowing against your property is the cheapest way to raise funds but you must bear in mind that you are putting your home as security for any borrowing and failure to maintain payments could potentially mean your home is at risk should you default on these …but look on the bright side - your extension could become a reality in 2017!

Sue Ellis works alongside Johnny Magee as a Mortgage Broker at JEM Financial Planning. The team has over 50 years’ experience in investment, retirement and inheritance planning, mortgages, protection and general insurance. To speak to Sue or Johnny, telephone 01386 840777 or visit www.jemfinancial.com