Your family is growing, your home is groaning. But no one wants to sell

Even a credit crunch isn't likely to put people off starting or extending a family – but it's making it harder to trade up to a bigger family home.

The combination of a near-freeze in mortgage funding, dwindling confidence in the economy and increasing monthly bills has resulted in a stalemate in the property market, in which homeowners are waiting and watching rather than selling.

According to the latest figures from the National Association of Estate Agents, individual agencies agreed an average of just seven sales in May, compared with 13 in May 2004 when the boom was still in full swing.

But being forced to stay on the same rung of the ladder can be impractical for a growing family – which is why more and more homeowners are choosing to make their existing home fit around them. According to recent research from insurer LV=, almost 1.5 million households will be having extensions built, or at least drawing up plans for one, over the next 12 months rather than trying to sell up and trade up.

One of the most popular forms of large-scale home improvement is turning a loft into a living space. Derek Livesey, director at the conversion firm Econoloft, says: "Especially in the South-east, there is not always the garden space for building outwards on ground level, so people are finding no alternative to using the space in their loft. They are still having families but simply cannot afford a bigger mortgage or the cost of moving."

Depending on the type and size of the extension, you may need planning permission. For terraced properties, consent will be required if the new living area exceeds 50 cubic metres, providing no extensions have already been carried out. For a standard semi-detached, you will need permission to build more than 70 additional cubic metres, while larger houses can grow up to 115 cubic metres before you need to apply. For more details, visit planningportal.gov.uk.

While staying put means avoiding stamp duty, legal fees and moving costs, home improvements are not cheap either. Even a basic loft conversion will set you back between £25,000 and £30,000, according to Mr Livesey – a sum that he admits "gets a bit tricky" to mention in the current credit conditions.

In recent years, the first port of call for raising cash has been your existing mortgage lender via a "further advance", which means upping your home loan against newly acquired equity. But now that house prices are falling, this is more difficult, says Melanie Bien, a director at broker Savills Private Finance. "Your lender may insist on another valuation if your additional borrowing takes you above a certain loan-to-value ratio – and this is now usually 90 per cent."

Even if you do qualify for a further advance, it's very unlikely to be priced at the same rate as the rest of your mortgage, which will make a big difference to what you have to pay each month. For example, increasing a £200,000 repayment mortgage priced at 5 per cent by £40,000 (which is payable at the average standard variable rate of 7.05 per cent), will cost £50 a month more than if the advance was lent at the same 5 per cent rate.

An alternative is to take a secured, or "second charge", loan. "The attraction of this type of lending is that homeowners can borrow over a longer period – 25 years, rather than 10 years on an unsecured loan – which keeps repayments down," says Ms Bien. "But with First Plus, one of the most competitive providers, announcing it was pulling all lending to new borrowers after 8 August, consumers have less choice and higher rates to contend with. What's more, this lending is secured against your home, so it could be repossessed if you default on the payments."

as long as your home improvement is going to cost below £25,000 – according to recent research from Alliance & Leicester, the average expense is £11,833 – an unsecured loan is always preferable, says Michelle Slade, a researcher at the financial information site Moneyfacts.co.uk. "First and foremost, it is not secured on your home. Second, unlike secured loans, the rates tend to be fixed, which means you can budget for your monthly outgoings."

It is also worth investigating credit cards that impose no interest for a given period. "If your credit score is good enough, the All in One card from the Halifax is offering 0 per cent on all new purchases for 10 months," says Ms Slade. "But you should have a repayment plan in place for after this."

There may be insurance considerations too, says Ashton Berkhauer at uSwitch.com: "If you are making any structural changes to a property yourself, you will first need to inform your insurer. It will probably introduce certain exclusions such as accidental damage. So you will not be covered if you knock down the wrong wall and the top floor falls through."

Insurance will be less of an issue if the work is being done by a professional building firm, as it should have public liability, or "professional indemnity", cover. However, if the renovations are major and you move into a hotel while they are being carried out, your insurer may impose exclusions such as escape of oil or water and vandalism.

When the work has been completed, you should see if your existing cover is sufficient. "If your home insurance offers blanket protection, it will extend to the new value automatically. But if it is bedroom-rated and you have another bedroom built, your premiums are likely to go up," says Mr Berkhauer. "Either way, it's important to check you are fully covered."

According to research from GE Money Home Lending, all the effort, time and money put into a home improvement should prove a good investment. A loft conversion could increase the value of the average property by over 12 per cent – or £22,898 – the research concludes. Building an extension could bring a potential boost of £19,800, while a conservatory could add £12,229 to the price.

But don't count your chickens, warns Jonathan Davis, spokesperson for Housepricecrash.co.uk, who predicts property prices will fall by 35 per cent between now and 2012. "In the early 1990s, couples would get married and move into a one-bed flat. Then they had children but couldn't upsize as the value of their home had plummeted. Their lender wouldn't let them sell at a loss and they couldn't raise any more money, so they just had to cope. In my view this is exactly what will happen again."

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