Arranging finance for your renovation or build can be an intrusive and lengthy process, we talk to Vestra about how to pass the ‘affordability’ test.
Words: Gillian Upton.
Planning an extension to your home is one thing but securing the funding for it is another. The hoops you have to jump through can be as stressful as waiting for planning permission and the more you want to borrow, the larger the hoops.
Arguably, that’s how it should be and had the checks been that rigorous back in 2008, the financial meltdown might not have been as dramatic as it was. But that’s another story… It does mean that today, lenders are not keen to lend for home improvements, so the options are to remortgage or take out an additional mortgage. It all depends on the amount you need to raise.
If it’s a small kitchen extension or loft conversion you’re funding, a personal loan is the most competitive and you can look at the major high street providers such as Metro Bank and Tesco, which will ask for three, four or five times your income to calculate how much they will lend, and check your credit worthiness. “An unsecured loan is the most cost-effective route,” says Jenny Tozer, Partner and Investment Manager at wealth-management company LGT Vestra. “The APR [annual percentage rate] will be reasonable if the loan is up to around £30,000,” she says.
But if you need £200,000 or £500,000 to dig out a basement, you’re looking at secured lending against the property. And be warned that the provisions for an additional mortgage are much more rigorous. Five or six times your salary is the standard ratio applied but be prepared to bare all to show disposable income, in the form of a detailed monthly budget of expenses and outgoings. “They’re trying to find out how much fat you have in the system,” explains Tozer. “The new buzzword is the borrower’s ‘affordability’.”
Loan to value ratio (LTV) is another criteria used, which checks the ratio of a loan to the value of the house. The higher the LTV ratio, the riskier the loan is for a lender. For example, if you have a £120,000 mortgage left on a house worth £1.2 million, the risk would be minimal to a lender as you own 90% equity in the property and your LTV is 10%. You’ll be penalised on the rate if your LTV is above 70-75%. “It comes back to affordability,” says Tozer. Moreover, while a personal loan is fully distributed, a retention can be made on a remortgage until the work is completed so you might not receive all the money up front. First-time buyers will find this process challenging to say the least, particularly if they have no credit history, which is why parents and grandparents are stepping in to provide a permanent roof over their heads. LGT Vestra’s advice is to ensure that bills for items and services such as phones and utilities are in first-time buyers’ names so that a credit history, upon which a loan may be granted, can be established.
Overall, LGT Vestra advise caution on any borrowing. “If you have secure employment it’s a good time to renovate and invest in your property,” she says. “But it’s not prudent to borrow to consume. The house price hike cannot continue at the same rate and South-West London has been an area of particularly high price growth. Caution is the message.”