How to fund a facelift for your house

A conversion or an extension can add value. But think carefully about ways to pay for it, says Stephen Pritchard
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The Independent Online

The average household plans to spend £4,360 a year on decorating and other improvements, according to the survey, which was carried out for savings bank ING Direct. Londoners will spend the most, at £5,610, followed by Scots. The Welsh will spend the least in the coming 12 months.

General decorating ranked the most highly among planned improvements (mentioned by 52 per cent of householders), followed by new flooring. A new bathroom was a priority for 27 per cent of homeowners and a new kitchen was cited by 24 per cent.

A survey carried out last year by Abbey, the mortgage lender, found similar results: the most popular improvements were new windows, kitchen or bathroom. Among more expensive projects, conservatories, loft conversions and extensions were the most popular improvements.

When financing improvements, few people rely on savings. ING found that one in five people is saving to fund spending. Although some householders might be able to cover improvements out of income, most will have to borrow money.

According to Abbey, the average home improvement loan is £20,000. Mortgage-based financing is the most cost-effective for the larger projects. Best buys for unsecured loans, according to Moneyfacts, the research service, range from 5.6 per cent with Northern Rock to 6.7 per cent with the Nationwide. The best two-year fixed rate, at 4.19 per cent with Alliance & Leicester, is substantially cheaper.

Homeowners have two main ways to arrange mortgage financing. The first is to ask their lender for a further advance. Provided the additional lending does not overstretch the bank's affordability or loan-to-value rules, there should be few problems. The disadvantage is that lenders may charge a higher interest rate for a further advance, or only offer it at the standard variable rate (SVR) - more expensive than the best rates in the market.

Lenders' policies do vary. Nationwide offers further advances based on its variable mortgage, or any of its fixed or tracker mortgage offers. If the advance is for improvements, borrowers can arrange a loan up to 95 per cent of the value of their homes. This percentage does, however, also include the existing mortgage. Homeowners with less accommodating lenders might want to consider remortgaging. The cost of doing so has risen in recent months, with arrangement fees of almost £600 common for some fixed-rate mortgage deals. But as rates are currently attractive, remortgaging can still be worthwhile.

Surveys on home improvements suggest that most people carry out work for their own benefit, but the right improvements can add substantial value to a property. This is one reason lenders will tend to be more flexible about remortgages and further advances to fund home improvements than they are when it comes to lending for other reasons.

Improvements that add space are the most likely to add value. But other improvements, such as adding central heating, should more than recoup their cost. Some improvements, including expensive kitchens or garden landscaping, may make it easier to sell a property. But they are not guaranteed to recoup the cost.

This can complicate matters when it comes to arranging financing for improvements. Homeowners who already have substantial equity in their properties can remortgage, or arrange a further advance, in order to release that money. Those who do not have the equity, or whose project will push their loan to 90 per cent or more of the property's value, should discuss the work with their lender or a good mortgage broker.

Revaluing the property after the work has been completed is one option. Another is to approach a lender used to arranging self-build mortgages, as they may be prepared to arrange financing based on the expected value of the property. A further option would be to use short-term financing, or savings, to fund the work and to remortgage, based on a new valuation, when it is complete.