Mortgage clinic: ‘Should I borrow an extra £15,000 to renovate my home?’

Can I release some equity from my home? How much will my repayments increase if I do this and come off my low fixed rate next year?’
Release the funds: Francesca Maynard-Williams hopes to use the cash to renovate
Adrian Lourie
Charlotte Duck15 November 2022

Francesca Maynard-Williams, a 24-year-old sales administrator, inherited a five per cent share of her grandmother’s two-bedroom chalet in Clacton-on-Sea, Essex, last year.

She used a mortgage to buy out her father and uncle, and although the property is solely in her name, her father still retains £50,000 in equity. She has a repayment mortgage on a two-year fixed rate due to end in March 2023. She thinks the property has increased in value by £20,000 to £190,000 and the plan had been to remortgage in March and release some of her equity.

“I’d like to take out between £10,000 and £15,000 to redo the kitchen and a bathroom,” she says. “How much will my repayments go up with this equity release and the interest rate rises?”

The advice

Jo Jingree, director of Mortgage Confidence:

First, we would run an affordability check and a budget planner to establish Franceca’s income and outgoings. Then we would look at the property value. Lenders tend to be conservative when valuing properties and down-valuations are quite common. This affects the loan-to-value, which can impact the interest rate Francesca would pay. If you have sufficient equity and affordability, lenders still allow additional borrowing, for things like home improvements or the purchase of another property.

The details

Price paid in March 2021: £170,000

Mortgage rate on a two-year fixed: 35-year term, 1.57 per cent

Monthly repayments: £374

Mortgage balance: £116,500

Dad’s equity: £50,000

If the lender agrees with the property valuation of £190,000 and we have established Francesca has sufficient affordability to take on a mortgage of £130,000, an increase in borrowing of £13,500, and the term remains the same at 33 years, the repayments would approximately be £745 per month. This is based on a 5.89 per cent two-year fix with no arrangement fee and a free valuation. If Francesca cannot afford this increase in repayments, we could look at a remortgage to a new lender, keeping her mortgage amount the same at £116,500. The monthly repayments would be around £668 if she keeps the remaining term at 33 years.

Augusta Onyiuke- Eluma, director, Songhai Property Finance:

Francesca’s property has seen a good price increase but not enough to release anything substantial when the costs of remortgage are factored in.

She would only be able to refinance up to a maximum of 75 per cent loan-to-value. As she only needs a maximum of £15,000, she could raise that amount, subject to valuation, and the remaining equity in the property would be £58,500, which protects her father’s equity of £50,000.

Francesca is concerned about rising rates yet wants to increase her borrowing. A loan of £131,500 (the current mortgage of £116,500 plus £15,000 additional borrowing) over the remaining 33-year term at a rate of six per cent would cost about £764 a month. If she kept her mortgage of £116,500, with rising interest rates of six per cent, this would work out at £677 a month.

I’d recommend she considers fixing for at least five years next time round. At present, five to 10-year products are typically cheaper, so not only does this make financial sense; she will also achieve certainty of payment for a longer period. This is now very helpful in a climate of rising interest rates. Typically house prices double on average every seven to 10 years, so she needs to give the property more time to see increases in value.

You should seek independent advice from a qualified professional before acting upon any information contained in this article

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