Ive made several videos looking at the cost of building house extensions in the UK. Its a topic that I endlessly discuss with my clients, but one thing that we seldom talk about is how they afford to build my designs. Sure, some of them tell me; a few got an inheritance, sold other properties or just have a massive pile of cash in the bank. But many of my clients have to get a mortgage to afford work to their home. Because I’m an Architect, and not a financial advisor, how my clients arrange funding is up to them. But given all the recent turmoil in the UK mortgage market, I though I’d better learn a bit more about how this works.
So, I interviewed a mortgage broker called Pat Cannon. Pat isn’t paying me to say this, Ive known him for years, he even helped me get the mortgage on my own house, as well as helping several of my past clients fund their projects. He’s really nice guy and he knows his stuff.
Let's say your home needs some more space. You consult with a friendly local Architect - who tells you the work will cost far more than your pot of savings. And you need to borrow against your exiting house to get the necessary funds. The first thing Pat pointed out is that this can be very tricky if your current mortgage is locked into a fixed rate. Ideally you want to plan any work to your home well in advance, so if you have a fixed rate mortgage you should be prepared to wait until it expires before arranging a new, larger mortgage.
For any mortgage lender, Pat advised that the two biggest concerns, are your income and the loan-to-value of your existing house. No mortgage providers will let you borrow more than you can repay and they definitely won’t let you borrow more than the value of your existing home. None of this was surprising but what I didn’t realise was that, as of October 2022, a couple of lenders in the UK will mortgage your home on the basis of its expected future value, after work is complete.
These lenders will take into account that if you make you home larger, or modernise it in some way, it is likely to go up in value, so they can lend based on the future price not just its current price. The few lenders who offer this will insist the work be inspected by a chartered surveyor. Their jobs is to check that the work to your home has been carried out in accordance with the approved drawings and built to a reasonable standard. So you cant easily change the design once it's been accepted by the lender and you cant hire a cowboy to build it dirt cheap. If you do, the lender might reassess the overall value of your home and change the terms of your mortgage afterwards. Pat made it clear that lenders who do this are very cautious about the loan to value. Just because they lend based on expected future price of your home, doesn’t mean they will lend a large proportion of that value.
Most mortgage lenders can lend up to 90% the value for an existing house, subject to certain conditions, but the lenders who base their calculations on the expected future value might not lend as high a percentage of that future value. Like all mortgage lenders, they don't want to risk going into negative equity. If this appeals to you please talk to a mortgage broker as early as possible, before you commit to any plans for your house extension. Pat did say that a typical mortgage lender is happy to lend money for any "legal" purpose. So, remortgaging to buy a car or go holiday is fine. As long as your earnings can cover the monthly payments and the loan to value is below the percentage the bank feels comfortable with.
Some lenders may still ask for architects drawings and costings before finalising a mortgage for a house extension. This means the bank might need you to hire a quantity surveyor to prepare a bill of quantities. This document breaks down all the individual elements of a new structure to explain their costs in a way the bank understands. Itemising the foundations, walls, roof, floors, windows and doors.
The last thing Pat and I discussed was sub-diving properties and how mortgage lenders can get nervous about granny flats. Its something Ive been asked to look at several times. A homeowner has a large garden or a big garage and they want to create a separate habitable structure, usually for an elderly family member. This is all fine and not at all complicated. As long as you don't want the structure to have a separate postal address, the planning system will treat this much the same as a house extension. But creating a separate property, with its own address and title deeds, will be treated by the planners like building a new house. Not an easy thing to do, especially if its in a built up area.
What I didn't know is that mortgage lenders can have a major say in this as well. They are happy to lend to fund the construction but even if you are successful in getting planning approval to subdivide your plot and create a separate dwelling, you cant just split your title deeds without the banks approval. If you call up your lawyer and ask them, they will check your deeds and see there is a loan against the property. This means the house cant be sold or subdivided without the banks agreement. The bank will look at your proposal to split the plot and realise that if you sell off part of your garden and the granny flat, the overall value of your home will drop. If that drop puts your current mortgage below the loan to value rate the bank agreed to, they wont let you split the site and sell off the granny flat. Pat advised, the solution to this problem would be to pay off enough of your mortgage that the loan to value works for the bank. Then sell the granny flat and recoup the money.
Pat went on to discuss specialised lending for property development or commercial purposes but that’s a post for another day.