The Mortgage Clinic: 'Should we extend our house or just move?'

'We have a two-bedroom home but need more space; and there's potential for a loft conversion. Whether by mortgage or personal loan, the work will be costly and we're concerned over disruption as we've a small child. In light of the credit crunch, would it be wiser to extend rather than move?' RM, by e-mail

The credit crunch and all its attendant ills – a 10.5 per cent house price slump, according to Nationwide last week, and turgid buying climate – has a creeping influence on our behaviour. Your uncertainty about whether to gain space by building up inside your own home instead of moving up the property ladder is the latest symptom.

Research by Lloyds TSB suggested a rise in vendors pulling their property off the market to spend money on improvements instead. "There's a trend towards people making the most of the space they have because of the costs of moving, and a loft conversion can be an asset to a home," says Peter Bolton King of the National Association of Estate Agents.

However, he adds, the weakening housing market could also work in your favour. "If prices fall, the cost of trading up becomes more economical as getting 3 per cent off the price of a house at the top of the market is much more than 3 per cent off a house in the middle of the market. If you're looking for more space in the long-run, the simple solution may be just to move."

While estate agents largely support additions to a property's value with a new loft, say, their general sentiment is now turning, according to Abbey bank research. When house prices head up, you can usually get back your outlay within a year or two; but with prices slipping, you can spend thousands without adding any extra value at all.

If you do build up, Bolton King stresses, don't over-develop your home and make it too pricey. "Check out other houses in the area and find out what the 'ceiling price' is. That way you can ensure you get a return on your investment."

Paying for the conversion is another matter; a common route has been to ask your lender for a "further advance" added to your existing mortgage. But slumping prices can affect your loan to value (LTV) – your debt compared to your home's value – and today's higher interest rates make tapping into your home's existing equity expensive.

Last week Halifax offered a two-year fixed rate at 6.34 per cent with a £999 fee plus a £349 further advance fee if the LTV goes up to 95 per cent. By comparison, the cheapest personal loan – if you have a sound credit record – stands at 7.2 per cent from the AA.

Send us your questions and you could receive £50 to spend at Amazon

Foxed by jargon? Worried by the credit crunch? E-mail a question to mortgageclinic@independent.co.uk. We will not reveal your identity, and we cannot give specific advice. If your question is printed, you'll receive a £50 voucher from Amazon.co.uk, so you can kit out your home with anything from a lawnmower to an espresso machine. www.amazon.co.uk/homeandgarden

Interesting? Click here to explore further