Our homes have become more important than ever, not only for eating and sleeping but for other needs like working from home and exercising. And while some homeowners will decide to upsize and buy a new property, others take the opportunity to plan home improvements
Are you planning some significant home improvements such as an extension or conversion this year? Wondering how to pay and whether you can raise funds from your mortgage to do it?
If you read Part 1 of this blog series, you will know that my wife and I recently remortgaged to fund an extensive home improvement project on our 1960s bungalow.
Now being a mortgage broker one would hope the finances would be under control when it came to financing the building work. I would say that it is under control but I have done some things that I would not normally do, and not recommend either!
As I mentioned in my earlier blog, I had made a bit of a boo boo with the further advance I needed, short term we were fine but I wanted to make sure we had the funds to cover the builders quote in reserve, therefore anything else we wanted had to be funded by other methods. Other things being a log burner (we are in Surrey after all!), shiny new kitchen with shiny new appliances, all the bathroom fixtures and fittings, new bedroom furniture, new sofas, the list goes on, you get the picture.
I decided that 0% credit cards could fund the extra stuff in the short term, just on the off chance the further advance didn’t come through later on. I was confident I wouldn’t go silly and run up a lot of debt. Everything purchased was tracked on our “big build” spreadsheet.
I wouldn’t recommend to a client to go out and get more credit cards as it can affect your credit rating so I’ll explain why I think it was OK for me to do it in this particular situation.
First of all I was confident I would get my further advance in the new year once the kitchen was installed so that would clear off any residual debt as I was tracking all the spending, and what was due, on my spreadsheet.
Secondly I had a decent amount of money in my business I could draw out to cover it all, however this would be subject to 32.5% tax on dividends. With my company year end being 31st March and in touching distance I didn’t want to increase my tax burden; I might have to take the money out later but that essentially defers the tax into the next tax year, not ideal as the rates will probably have risen but it will help my cashflow now.
Thirdly I know I don’t need to remortgage until my fixed rate is up in mid 2019, by which time I’ll be back to using just one credit card and clearing it each month as before. So any short term effect on my credit rating would have recovered by then.
So I and my wife have put approximately £12,000 on credit cards that we will clear in the spring.
The time came to re-apply for the further advance and as I hoped the application was fine. Funnily enough this time they decided they didn’t want to do a valuation and would use the valuation they had on file so no worries about having a kitchen or not this time around.
Advice in this area would be to make sure you have covered all the bases, research how much the fixtures and fittings and nice bells and whistles are going to be. Record everything, you can formulate a complicated spreadsheet as we did or just write it down, either way make sure you are sticking to your budget. We haven’t got too carried away but, for example, we did say we weren’t going to buy any furniture until we had finished and we have. In fact we’ve spent a good £5,000 on furniture, which we can’t sit or lie on for another few months!
If you’ve read my previous blog post you will already know some of the ‘challenges’ we have come up against during the build. In summary, I hope the following tips will help you with any remortgaging / home improvement project you may embark on:
You can only borrow against the current value of your home. Property price increases and minor improvements can increase the value sufficiently. Be realistic and have a clear idea of what your home is actually worth – not what you want it to be.
Make your case to the mortgage lender surveyor. Some surveyors will have a good idea of what your home is worth based on the type of the property and area you live. Others may not. Do your research so you can pitch a value at the surveyor, backed up with hard evidence of comparable properties and the current market.
Get your finances in place before work begins – if you need a bit more cash further down the line you may struggle to remortgage if the house is a building site.
Make sure you know how much you need. Generally most people underestimate the cost of a building project, so get quotes in early so you crunch the numbers and work out if you can raise the funds before you commit in anyway.
Invest the funds raised from remortgaging in an instant access account such as a savings account or premium bonds – it might as well be working for you while you’ve got it.
Agree a payment schedule with your building contractor based on progress, not dates. That way you won’t be paying out for work that hasn’t actually been done.
Consider whether there may be other costs associated with your build. For example, will you need to rent somewhere why work is carried out? If you have no cooking facilities for a few weeks, takeaways and eating out will increase your monthly household spend.
Budget for all the fixtures and fittings. Do you really want to recycle your old appliances in your shiny new kitchen? Or sit around an empty fireplace because a log burner wasn’t budgeted for? If you’re extending your home to create more space, you may find you need more furniture to fill the space; make sure you’ve thought through and budgeted for these additional nice to haves.
If you’re planning a home improvement project and need to raise finance, give me a call. I’m happy to talk to you about my experience, and also explore your remortgaging options.
As I have recently explored in this blog, remortgaging to finance home improvements such as an extension, loft conversion, new kitchen etc. can be a good way to get the vital capital you need. For many it is the only realistic way to afford the house of your dreams.
As a mortgage broker I have helped numerous clients to remortgage for this reason, and last year I became my own client and remortgaged so we could do extensive work on our house.
This is my story (part 1)…
My family moved house in 2015 with grand plans, the house we were moving to was double the size of the one we had been living in for nearly ten years, exciting times! However, we always planned to improve the property and last year we started work. In this post I’m going to try and impart some of my experiences and what lessons have been learned.
From a financial perspective it made sense, the location of the house is a bit further out of town than we originally were, but still a nice area. Our old terrace sold for £415,000 and our new place at 1850 square feet represented good value for money at £490,000.
Needless to say at that price we knew the place was going to need a bit of work but we weren’t in a position to carry out the work immediately, you see I had a plan!
As I’ve said in previous blogs when you borrow for home improvements you can only borrow against the current value of your home. So we didn’t have any room to get the £100,000 that I estimated we would need to carry out the extensive refurbishment we envisaged. Therefore we bought the house with the intention of living there for a couple of years and then remortgaging to get the funds together after two years. We still needed to add value though, without spending too much, so we could get out the money we needed. My estimate at the time was that we needed to get the value to £650,000 in that two year period.
We had a relatively high mortgage on our last place as we had had some works carried out there and had borrowed to pay for it. We ended up with a mortgage of £392,000 on the new place so an 80% mortgage. This enabled us to keep some funds back, approx £10,000, to smarten the place up a bit.
Our new house is a 1960’s bungalow that had been extended in places, two bedroom downstairs and two upstairs in a dormer loft conversion that the previous owners had carried out a number of years ago. The décor was questionable at best and I didn’t feel the work that had been carried out was to a particularly high standard. There was a decent looking kitchen in there that, although ultimately we won’t keep, was good enough for a couple of years. The general layout of the property was a bit odd as well, but we loved the size of the place and set to work almost immediately.
We had to decide where to spend the £10k, but to be honest it was pretty easy. The main bedroom downstairs had an en-suite that had seen better days, equally the family bathroom in the dormer also needed updating. We employed a friend who does bathrooms and he set about the task of fixing us up with two new bathrooms. We went for good quality fixtures and fittings, walk in showers, no baths, contemporary wall hung sink units, funky towel rails and cool tiles. They looked great and we were happy with the results on the whole.
After this I got my scruffs on and redecorated the main bedroom and the two bedrooms in the dormer, which are our kids’ rooms, new carpets were also fitted in these rooms. Other than that we didn’t make any visible improvements so when it came to remortgage after two years I had to make sure I spoke to the surveyor to pitch my case for a £650k valuation.
In the intervening time between moving and applying for our remortgage we had to plan what work we wanted doing and get the builders in to quote, so although there wasn’t a lot of activity we still had that in our minds.
Planning permission was required as the house had been extended previously and we had a couple of applications go in as we wanted to make an amendment, all in all permission was granted to carry out the work. We wanted to keep the same footprint but remove the loft space and small loft room at the front of the house and replace with a new roof spanning the width of the house and giving us two new rooms, a master bedroom with en-suite and a home office at the front of the house with a gable end replacing the previous hipped roof. As well as this we wanted to knock down some walls downstairs and make the house “flow’ better with a new kitchen in the heart of the home.
We got some builders around to quote, some were loft specialists and some general builders. I was surprised at the difference in costs with one company quoting an absolute fortune to just do the loft and not the other work we had planned downstairs. Inevitably the cost to do what we wanted was more than I had envisaged so I needed to put my thinking cap on and come up with yet another plan!
Our dilemma was do we do the roof/loft bit only and leave downstairs to another time or do we go for it and do it all in one hit? This is where hindsight may have helped considerably! Anyway we decided for better or worse we are going for it in one hit, costs were looking around the £150,000 mark so more than I had originally envisaged, and this didn’t include flooring, bathroom sanitary ware, not to mention the lovely new furniture that my wife desired!
I applied to Virgin Money for the mortgage, the reason for this is that as I am a limited company director and they will take the gross profit before corporation tax plus director’s remuneration. We needed to max out and we applied to take our mortgage to £500k and that would give us about £135,000 to play with as the mortgage was down to about £365,000 by this time. So not quite £150k but we had saved a bit up and I said to my wife “It’ll be fine!”.
Virgin Money instructed a surveyor to view the property and I met with him, showed him the improvements we made and gave him my arguments about why I thought the house was worth £650k. My point was that we had 1850 square feet of space and I had done some local analysis and that sort of space was getting £750k plus so ours must be worth at least £650k even if it has green walls (questionable décor that I mentioned!). He agreed so we were good to go, in a couple of months I was to have £135k burning a hole in my bank account!
After we had chosen our building contractor we told them we’d be ready to get started in June. However due to reasons I still don’t understand the scaffolding company didn’t come until August. Anyway when they arrived we were suitably excited. After day one the house had about 30% scaffolding coverage and we needed the full “tin hat” experience so there was a few days work for the scaffolders.
As we were going on holiday shortly we thought, great they’ll be able to do loads of stuff while we’re not here.
Anyway we returned from our fortnight away to find the house looked exactly the same with no further scaffolding done and therefore no work done! Grrr!
So now we are in September and no progress has been made. There were a number of excuses but eventually the scaffolding was erected with the tin roof over the top, it was enormous. So by the beginning of October we were good to go.
The builders set about demolishing the roof and knocking walls down. The progress was pretty quick and we were thinking it could all be done by Christmas. How wrong we were! When it came to putting things back together again things slowed down somewhat.
Also around this time we realised we’d have to apply for a bit of extra cash form the mortgage company, this is something I am pretty adept at! As we had just taken a remortgage from Virgin Money I needed to go back to them and ask for a bit more. The application was accepted and we sent in the relevant documents required. A few days later the phone went and it was a surveyor saying they needed to value the house for the application.
The only problem was that at that precise moment in time we had no roof and the kitchen had been ripped out! This is a bit of a schoolboy error on my part although I wasn’t expecting them to want to revalue the house bearing in mind it had been done only a few months earlier. I ended up putting it all on hold until the house was in a better state, not a massive problem as I knew we’d get the money and we had enough to keep everything on track.
The funds we had from the original remortgage we kept in premium bonds, we didn’t win a million but we did land the odd £25 prize.
We had a payment schedule with our building contractors, and here we made a mistake in agreeing to a schedule based on dates rather than specific points of the build. This left us having paid about 80% of the fee before Christmas but being nowhere near 80% complete. The final payment was to be on completion so at least there was still a bit of an incentive for the builder to complete the work.
Definite lesson learned there, make sure the payment schedule is based on work completed.
The project management of the build was under the control of the builder, I’m not sure whether if I did this again I would get a specialist in, as the building firm has several jobs on the go then the man in charge is only on site once or twice a week and I don’t think there was an awful lot of control and planning. It seemed to me that at the beginning of the week he would give the guys on site a task and then leave them to it, regardless of how long that task would be.
Take the roof for example. The roof structure arrived on a lorry and was lifted into place by a large number of men in one day. Then when it came to tiling the roof it took ages. The tiling was not done by specialist tilers but by the general builders. After about a month of this they decided to get a specialist contractor in and they covered loads of roof in a couple of days. It struck me as odd that they didn’t organise the specialist from the beginning.
Another thing to consider is living in or living off site. We chose to live on site (Although not much of a choice given our budget). If you are considering work to the extent we have then I would give serious consideration to moving out. It has been really hard work, and it is not over yet. We have gone through winter with no kitchen and limited heating – including the Beast from the East.
Moving out does come with a cost of course, in Surrey to house our family for six months we would probably be looking at £1500 to £2000 a month, which is a lot to find. In hindsight though I think we should have hung on another 12 months and saved the money up to pay for a rental for six months. Easier said than done though.
It’s not over yet, and nor is this blog series! We are nearing the end of our build and we can see light at the end of the tunnel but it has been stressful, expensive and tiring. I think we are looking at a couple more months before it is fully finished and I may well impart more things I’ve learned in due course.
In Part 2 I will be sharing how I’ve been juggling the finances in recent months, and provide you with some tips for ensuring a smooth home improvement and remortgage project if you decide to go down this route.
As always, if you do need to talk to someone about mortgages or remortgaging, please give me a call.
