Funding an extension to your home
If you’ve run out of space in your property but don’t want to move to a new one, a home extension can be a great way of adding the extra room you need.
Moving somewhere bigger isn’t always affordable, especially once you add on the costs of legal fees, stamp duty, removals and anything else that may arise. Instead, you might be able to take a similar amount of money (or less) to extend your existing home.
Home extensions can still be costly, however, so it’s essential that you find a suitable way to fund the project.
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How much will you need to finance an extension?
Before you consider how you’ll finance a house extension, you first need a realistic sense of how much it’s likely to cost.
As a rule of thumb, an extension will set you back between £1,350 to £2,250 per square metre (excluding VAT). Which end of the pricing scale your project falls under depends on the type of house you have, where it’s located, and the kind of extension you want to build.
For example, a bathroom extension could add a further £5,000 to the cost of building your extension’s shell. On the other hand, a kitchen extension could add a further £10,000 to your fee. Both of these prices will also be influenced by the quality of products being fitted.
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How to fund an extension
There are many ways to fund an extension. Your unique personal circumstances have a bearing in deciding which funding method is most appropriate, so it’s wise to do research and get expert advice before you decide.
Second charge mortgages
Second charge mortgages (also sometimes called a homeowner loan or a secured loan) are a good option if you have a decent amount of equity in your property. Equity is the amount of your home that is mortgage-free. For example, say your property was valued at £200,000 and you had £75,000 outstanding on your mortgage, you would have £125,000 worth of equity. A second charge mortgage is a separate borrowing to your original mortgage and can be with either your existing lender or with a new lender.
| Pros | Cons |
| A second charge mortgage is usually cheaper than an unsecured personal loan. | A second charge mortgage is secured on your property, the same as a first mortgage. |
| You don’t need a perfect credit rating. | You will need to have sufficient equity in your home to cover the amount you want to borrow to finance the extension. |
| Secured loans can be repaid over ten years or even longer. This could help to lower overall monthly payments making day-to-day living more affordable. | Homeowner loans may have variable interest rates. If rates go up, so could your monthly cost. |
| As long as you have plenty of equity, you may be able to raise a relatively large sum. Secured loans range through Loan.co.uk from £10,000 all the way up to £5 million! | The longer you take to pay off the second charge mortgage, the more overall interest you’ll pay. |
Remortgaging
If you are on a Standard Variable Rate (SVR) mortgage, or a fixed-rate mortgage nearing the end of its term, your best option may be to take out a new mortgage for a larger sum which includes the cost of the extension.
With low rates available for relatively lengthy fixed terms, it’s possible (if you’re currently on SVR) that a remortgage could end up costing less each month than you’re currently paying. If you’re on a fixed-term mortgage that is not close to ending, however, early repayment charges could make this approach less cost-effective.
| Pros | Cons |
| A remortgage could let you borrow the new, increased sum from either your current or a new provider at a lower interest rate. | Remortgages often come with an initial arrangement fee attached. |
| You may be able to pay for the extension and perhaps also consolidate debts into a single, affordable monthly mortgage payment. | As your home is being used as collateral, it could be repossessed if you fail to keep up with the repayments. |
| A remortgage is typically repaid over a long time frame. This could help to lower overall monthly payments making day-to-day living more affordable. |
Personal loans
An unsecured personal loan could be a convenient way of financing an extension. The loan isn’t secured on your house or other property, so you tend to need a good credit rating and the costs will generally be higher than on secured borrowing.
| Pros | Cons |
| Your monthly repayments will be fixed, making it easy to budget. | You can borrow up to £30,000 (sometimes more). This may not be enough to finance your extension, however. |
| You can usually choose how long to spread the repayments over – typically one, three or five years | There may be early repayment charges if you wanted to pay off the loan early. |
| The APR (amount of interest you pay) is likely to be lower than with a credit card. |
Bridging loans
In most situations, bridging loans are used to help people complete the purchase of a property by offering access to money on a short-term basis. However, if you’re planning to sell your house and believe you could significantly increase its value by completing an extension before doing so, a bridging loan might be a reasonable option to finance the extension. Similarly, if you’d bought a house with the intention of renovating and selling it on for a profit fairly quickly, a bridging loan can unlock funds for making home improvements like an extension. Bridging loans provide finance generally for between a few weeks and a year.
| Pros | Cons |
| You can normally borrow up to 70-75% of the value of the property you’re putting up as security if there’s no other mortgage secured on it. | High interest rates, usually calculated by the month. |
| It can buy you breathing space to extend, revalue and arrange more favourable long-term mortgage finance. | Fees for the arrangement of bridging loans can be expensive (but can often be deducted from the sum borrowed). |
| You may be able to opt to pay the interest only at the time that the loan capital is repaid. |
Savings and credit cards
If you have substantial savings, consider using some of them to fund all or part of your extension. It’s generally more cost-effective to spend money you have than to borrow money. Think about using a credit card to fund any shortfall, but remember that credit cards usually have high interest charges.
| Pros | Cons |
| If you have enough savings to pay for the extension, you’ll have no ongoing monthly interest charges or repayments in future. | If you spend a lot of your savings on your extension, you’ll have less of a cushion if something unexpected happens. |
| If you use a credit card with a low or no interest offer and can repay the balance quickly, you may be able to fund the extension very cheaply. | Credit cards usually have high-interest charges if there isn’t a 0% offer. Don’t forget to transfer your balance when the 0% offer ends. |
| Generally, cards have quite low credit limits. You may not be able to fully fund your extension this way. |
Further advance
A further advance is when you ask your current mortgage lender if they would consider extending more money on your existing loan. Whether or not they will depends (among other things) on how much equity you have in the property and any possible increase in the value of the property once the extension is built.
Be careful, even if they agree. The new arrangements may mean that you no longer qualify for the low fixed rate you are on currently (due to the percentage equity you hold being lowered by the new advance), and the lender may insist your whole borrowing moves to a new, higher rate.
| Pros | Cons |
| A further advance can be cheaper than a secured personal loan. | You would be increasing your mortgage. |
| You won’t have to switch lenders and may be able to avoid arrangement fees. | The further advance (if not the entire borrowing) may be at a less competitive rate than your original mortgage. If mortgage rates increase, you could end up paying more interest than on a secured loan and could cost you more overall. |
| Your lender may allow you to make over repayments so that the amount you borrow to fund your extension can be repaid quickly. They may also allow you to repay over a longer period of time. | Adding to your mortgage borrowing could work out expensive overall as you are likely to be spreading repayments over a longer period. |
Will you need planning permission for your extension?
Home extensions are widely considered to be a permitted development, meaning planning permission is not usually required. But, before you proceed with your plans, there are some exceptions to the rule.
The HomeOwners Alliance has a useful guide that lists all of the exceptions you need to be aware of. It’s also worth double-checking with the Planning Officer at your local authority to ensure that your plans fall within permitted development guidelines.
Will you need a lawful development certificate for your extension?
It’s never obligatory. However, if you’re building an extension under permitted development rights, it might be sensible to obtain one.
A Lawful Development Certificate certifies that a project was legal at the time of construction. So if you’re adding an extension to your house and may want to sell the property in the future, by which time development guidelines could have changed, the certificate will serve to allay possible concerns from buyers by showing that the construction was legal at the time that it was carried out.
Planning and building an extension to your home need not be complicated. Working out how to finance a house extension in the best way isn’t complex either. Loan.co.uk is here to help if you need further assistance.