How to Finance a House Extension? 

If you’re thinking about making your home bigger with an extension, you might be wondering how to pay for it. Don’t worry; we’re here to help – this is a guide about how to fund a house extension in 2023. 

Every month, nearly 7,000 people visit our website looking for guidance on loans. Many of them want to know about home improvement loans, so you’re not alone in wanting to understand this.

In this guide, we’ll talk about:

•  What a home extension is
•  How to find and compare quotes
•  Whether you need permission to build an extension
•  How much a house extension might cost
•  How much value an extension might add to your house

We know that loans can be hard to understand. That’s why we’ve tried to make this guide simple and clear. 

So, get ready to learn about how to fund a house extension.

How much does a house extension cost?

One UK bank estimates that a home extension costs around £2,000-£3,000 per square metre and around £5,000 per square metre for more complex projects, such as a basement conversion. 

As expected, the exact costs will be determined by the specifics of the project and your location. There are other home extension costs to consider, including:

1. Architect fees – these are around 7% of the total construction costs. So for a £40,000 extension, you should expect to pay almost £3,000 to your architect.
2. Site survey – a site survey may be required before starting. These cost around £500
3. Planning permission application – this costs just over £200 in most cases
4. Insurance policies – an extra insurance policy might be required during the building process, and a new insurance policy will be required once the extension is complete
5. Furnishing the new space – interior design and furnishings is likely to cost thousands of pounds as well 

Although the costs of an extension can be expensive, the extension itself can add value to your home and will typically offset these costs. 

How much value will an extension add to my house?

A house extension can make a positive difference in the value of a typical home. According to Uswitch, the actual amount can vary depending on the quality and size of the extension. When selling a property, real estate agents consider how many bedrooms and bathrooms a property has and how much floor space there is. For example, an extension to a standard three-bedroom home can increase property value by 23%.

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How much can I borrow for a home extension?

The amount you can borrow to build a home extension will depend on the security value you use as collateral (if any), the lender’s Loan-to-Value (LTV) ratio, your personal finances, and your credit score. 

For example, if you have a property worth £175,000 and an outstanding mortgage balance of £100,000 with no other debt, you have £75,000 home equity. If a lender offers a home equity loan with an LTV ratio of 80%, you can borrow up to 80% of your equity (£75,000), which would be up to £60,000. 

I’ll discuss home equity loans as a method to refinance a home extension in more detail later. 

Can you remortgage to pay for an extension?

Some homeowners can remortgage their current mortgage deal and extend their borrowing to pay for an extension. This can typically be done by extending their mortgage with their existing mortgage lender or considering deals from other mortgage lenders. 

The homeowner will need to have enough home equity in their property to extend their borrowing. Home equity can be calculated by finding out the property’s current market valuations and subtracting all debts secured by the property, including the mortgage used to buy it. 

I’ll go into mortgage refinancing to fund a home extension in more detail later. 

Do I need to tell my mortgage company if I build an extension?

You don’t usually have to tell your mortgage lender if you have built an extension on the property. However, you might want to let them know if you’re looking for a new mortgage deal in the future and want to see if you can borrow more.

An extension is highly likely to increase the value of the property. This may allow you to borrow more against the property by extending your current mortgage with your current mortgage lender. 

From my experience, it could also be achieved by using the increased equity to take out a separate home equity loan. 

Methods to get a house extension loan

There are many ways to raise funds to pay for a home extension. Below we have discussed the most popular methods used:

1. Unsecured personal loan

An unsecured loan might give you the funds (or the remaining funds needed) to pay for your home conversion. These loans are usually capped at smaller amounts, so you might need some savings to contribute to the project to make it work. 

When it comes to secured vs unsecured loans, the only downside to using an unsecured loan is that the interest rates offered are typically higher than using a secured personal loan. Although you won’t have to list an asset as security within the credit agreement, you will probably need to pay more to the lender overall. 

2. Credit cards

Similar to an unsecured loan, a credit card might be a way to fund a small home conversion or contribute the rest of the money needed to give the project the green light. Using a credit card offers you greater protection due to the Consumer Credit Act as well, so it’s worth considering. 

Credit card debt doesn’t require assets to be listed as collateral in the agreement, so the interest rates on offer tend to be higher than secured loans. 

3. Secured loan

Secured loans allow the applicant to list an asset as security, so if they default on loan repayments, the creditor can repossess or force the asset’s sale to clear the debt. Property, home equity, and vehicles are the most common assets used as security in a secured loan.

Secured loans are a good option to finance a home extension because they typically allow the homeowner to borrow a larger amount on average. Moreover, due to the security within the credit agreement, the lender can usually offer more competitive interest rates than unsecured lending. 

Below, I have listed different types of secured loans that can be used to fund a home extension. 

4. Home improvement loan

A home improvement loan, also known as a remodelling loan, is usually a type of secured loan offered by banks and some online lenders. You can probably find them offered by your existing mortgage lender. 

They provide a lump sum loan to the homeowner, which must be used to make home improvements. Adding an extension to a property would qualify. Sometimes the loan can be paid out in stages upon completing certain ‘milestones’ in the extension project. However, not all of them work like this. 

5. Home equity loans and HELOCs

Home equity loans and home equity lines of credit (HELOC) are two other types of secured loans that could be used to finance a home extension. They are known as a second mortgage, and both use the equity built up in a property as security to provide a loan that can be used for any purpose, including home renovations. 

The loan is charged with a fixed or variable interest rate, usually similar to a mortgage’s rates. However, these two types of equity loans don’t work in the same way…

A conventional home equity loan provides a lump sum loan, and monthly repayments begin immediately. The repayment period continues for a fixed period. By the end of the period, all of the principal loan amount and interest will have been repaid, providing no payments were missed. 

A HELOC works with two periods: the draw and repayment periods. The draw period is a set period where the homeowner can access as much of the loan they have been approved for in stages. 

Staging out the loan can help manage the budget of a home renovation project. Following this is the repayment period, where the loan gets repaid in monthly payments that include interest until all of the loan taken has been repaid. 

It should also be noted that securing a loan with home equity puts your home at risk if you default on the loan. As I see it, the lender could foreclose and sell your property to clear the debt. 

6. Remortgaging

As mentioned earlier, remortgaging to fund a home extension is possible. This works by asking your current mortgage provider, or a different one, for a new mortgage deal but simultaneously borrowing more. You’ll only be able to do this if you have built up enough home equity – e.g. through continual mortgage repayments – to satisfy the lender’s criteria. 

For example, if you have a £100,000 mortgage on a £300,000 home and need £60,000 for an extension, you can switch your mortgage to a new one worth £160,000. 

7. Savings

Using your savings isn’t the easiest way to fund a home extension, probably because it will take a long time to save, and costs will rise over time to hit your savings goal. However, savings are an excellent way to fund the project along with any of the credit options listed above. 

It’s beneficial with unsecured lending as these options may not provide you with a nig enough loan to pay for the project. But, using savings and credit cards or savings and an unsecured loan could make it possible.

Self-Build Mortgages

Self-build mortgages are primarily for people who want to build their homes from scratch but are also available for DIY home extensions. This type of product releases funds in stages as and when the build progresses. As you can pick the labour and materials yourself, this mortgage product can work out cheaper than other options.

Self-build mortgages aren’t widely available, so you must research to find the best deal.

Green Finance Options

Cultivating a greener home benefits the planet and can help you save money in the long run. When financing green home renovations, several banks offer green borrowing solutions to homeowners. Santander, Halifax, and Nationwide are just three lenders currently offering green loans to help you make your home more environmentally friendly.

The government also has several schemes and grants to help people make their homes more energy efficient.

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What is the best way to fund a house extension?

You have several options to fund your house extension project. The best method will depend on the credit options available to you. Always make a loan comparison before settling on a solution. Secured personal loans usually offer more credit and competitive interest rates, but it depends on a good credit rating. However, home extensions on finance are one way to achieve your goal.

When you’re comparing options, keep an eye out for the following:

1. Early repayment charges in case you want to clear the loan early
2. Closing costs added to the end of the loan term
3. A potential broker fee if using a broker, or any other hidden fees