If you’re thinking about carrying out renovations on your home, you’re probably trying to work out the best way to pay for them. You may already have it covered with savings. Or you may be thinking about taking out a loan so you can get started. Or perhaps you’re happy to save the money and wait until you have enough. But could a mortgage fund the work? Depending on the level of work involved you may be able to take a standard mortgage, or you may need a specific renovation mortgage. Read on to find out more about your options.
Second mortgage for home improvements
A second mortgage or second-charge is where you borrow funds from an alternate provider to your existing mortgage, without repaying your existing mortgage. This may be an option if your existing lender is unable to provide the required additional funds, or if you can find a second charge with favourable terms but don’t want to lose an existing deal or pay an Early Repayment Charge (ERC) on your current mortgage. An alternate would be to take additional borrowing with your current lender, which we’ll talk more about below.
A second charge uses the equity in your home as collateral and is completely independent from your main mortgage. So, you’ll have two separate mortgage payments to manage. If you want to combine your second charge with your main mortgage in the future, you may have tie-in periods and ERCs with end dates that don’t align.
Second charges are generally available to homeowners, those with second homes or buy-to-let properties. As such, they may offer a viable option to fund renovations.
As usual, lenders will assess your income, credit history, and affordability to ensure you can manage both mortgage repayments. Also, if you’re applying for a second-charge mortgage, you may need your existing lender’s permission to proceed.
It’s important to be aware of the costs and risks involved though:
- Interest rates are typically higher than first charge mortgages because the lender takes on more risk.
- Additional costs may include arrangement fees, valuation fees, and broker fees.
- Importantly, if you fail to keep up with repayments on either mortgage, your home could be repossessed. The first charge mortgage lender has priority in case of default. However, the second charge lender can also force a sale to recover their loan.
- The amount you can borrow depends on the equity in your home. Lenders usually allow borrowing up to 75–95% of your available equity, factoring in your existing mortgage. This will vary by lender though.
Whichever option you go for it’s important to make sure you can manage both mortgage payments. You should also compare the interest rate and fees with other borrowing options, such as a personal loan. However, a second charge can be a convenient way to fund smaller renovations without the complexity of a full remortgage.
Can you borrow extra money on your mortgage for renovations?
If you don’t want to take out a second charge mortgage to fund your renovations, you may be wondering if you can increase your existing mortgage instead. And the answer is yes, but only if you meet your lender’s criteria. Usually there will be restrictions as to what level of renovations can be completed without needing a specialist renovation mortgage.
There are two main ways you can do this:
Additional borrowing: involves borrowing more money from your existing mortgage lender to fund renovations. This means you can retain any existing deals that you have and avoid having to pay any ERCs attached to your mortgage. Generally, any additional borrowing will have a separate product to your main mortgage and potentially have a different term and/or repayment type. The amount you can borrow depends on your financial situation and the lender’s criteria. You may also find that there are fees involved.
You’ll also need to bear in mind that your main mortgage and additional borrowing will likely have different product end dates. You will need to take this into consideration if you want to remortgage to an alternate lender in the future.
Remortgaging: is when you move your mortgage to a new lender. At this point you can also apply to borrow more money. This means that all your borrowing will have the same product, term and repayment type, which can make it easier to manage. However, you may have an ERC to leave your current lender if you are currently tied into a product with them. There are also likely to be fees involved with your new lender, which will vary depending on what each lender can offer.
Can you add renovation costs to a mortgage?
Yes, it’s possible to add renovation costs to a mortgage. You may be able to do this with a standard mortgage, either when purchasing the property, or when remortgaging to another lender. Depending on the level of work required, you may need a specialist mortgage. Some lenders, including Suffolk Building Society, offer specific renovation mortgages.
Renovation mortgages are designed for properties that need significant renovations and/or structural changes, large extensions, or where the property will not have a working kitchen and/or bathroom for a period of time. The amount you can borrow is generally based on the post-renovation value rather than the current one.
Funds are typically released in stages as the renovation progresses. The property may need inspections at different stages to ensure work is completed to the relevant standards.
Lenders usually offer around 75% of the estimated post-renovation value, and a larger deposit of 15–20% of the total project cost is often required.
Interest rates may be slightly higher than standard mortgages. You should also expect to pay additional fees, such as valuation, legal, and specialist insurance costs.
Can you get a mortgage for an extension?
Extensions are a form of renovation, but you may or may not, need a specific self build mortgage. Small extensions can generally be completed using a standard mortgage. However, significant extensions will often require a specialist mortgage. It’s worth seeking advice from a broker or lender at the planning stage.
Whether you chose to live in your home while renovations are carried out is up to you. Your decision will generally be based on the work being carried out and the disruption it causes.
For example, if you’re having your main bathroom replaced but have an ensuite, you’re likely to stay, even if it’s inconvenient.
Whichever option you go for, always consider the potential risks. For example, if you can’t keep up with your repayments, you may lose your home. Also, make sure you factor in additional costs such as legal fees and valuations. If you’re completing a large renovation or extension, you may also need specialist insurance to cover the period of the renovation.
You may also want to consider whether the renovation will add value to your property to justify the borrowing.
It’s advisable to consult with a mortgage broker or lenders directly to understand your specific borrowing capacity and to explore all the options. Don’t forget if you do have an existing mortgage, you should notify your lender before making any structural changes, even if you don’t require additional borrowing from them.
If you want to get started today, why not complete our decision in principle form? It only takes around 10 minutes and will give you an idea of how much you could borrow.
