The launch of new planning rules making it simpler for owners to build home improvements such as extensions and conser-vatories could result in a flurry of remortgage activity amongst borrowers that have considered moving, but are wary of the uncertain market conditions.
In a new white paper from the government, planning rules are to be amended to allow homeowners to undertake certain building jobs without the need for formal planning application and approval, so long as there are no objections from neighbours. The move has been implemented to ease bottlenecks suffered by many planning authorities, as well as reducing the estimated £1,000 cost the public faces when lodging simple building applications, the majority of which are approved.
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With the expectation of further interest rate increases over the coming months and the current high level of property prices, some commentators think that the changes could sway more homeowners to stay put and invest in their existing properties rather than moving to a new home. Announcing the changes, Ruth Kelly, Communities Secretary, said: “Many people do not want to move but do want more room to bring up their kids, or to make minor home improvements.”
Essentially the rule changes will enable planning bodies to focus on developments designed to improve their local areas by removing from their remits major national projects, which will be dealt with by another planning authority, and low-level buil-ding plans like home improvements.
Paul Wootton, real estate partner and head of the national planning team at law firm Eversheds, explains: “Local Authorities are struggling to cope with the volume of planning applications. By removing nationally significant projects and minor developments from this process they should be able to focus their resources on schemes such as new residential development and the regeneration of their areas. A lot of time and money is currently wasted unnecessarily in a complicated system. We are in support of anything that improves the planning system.”
There has been an increase in interest in home improvements over the past few years, partly prompted by the growing cost of borrowing and moving, but also fired by an explosion in TV programmes and publications dedicated to home makeovers.
Research carried out by lender Birmingham Midshires, even before the white paper was published, revealed a growing trend towards value-enhancing improvements, particularly amongst young buyers. The lender says that canny borrowers are turning their backs on traditional improvement favourites like bathrooms and kitchens in favour of space-adding schemes in the loft, basement and other extensions, to maximise their future sale price.
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Birmingham Midshires’ research amongst 2,000 people found that 19 per cent of homeowners under the age of 25 years would consider converting their lofts, whilst 15 per cent will consider the addition of a conservatory. The lender says that homeowners in the North are most likely to consider extending their property (27 per cent) compared with Londoners (21 per cent), although more Londoners (76 per cent) are likely to undertake renovations to improve the saleability of their property.
Launching the findings, Tim Hague, managing director of mortgages at Birmingham Midshires, said: “Young homeowners who have had to scrimp and save to get onto the property ladder are working harder to ensure they get the highest possible price for their property. There’s no doubt that it’s a good time to sell property and the creation of extra space will always appeal to buyers. Homeowners should, however, bear in mind that the traditional 2.4 child family model is changing, so the space you have and any additional space that is created should be as flexible as possible to accommodate homebuyers of all shapes and sizes.”
If getting planning permission to embark on a new building project is becoming simpler, then funding the work is somewhat more complex. The most obvious answer would be to remortgage, but other options include taking out a further advance from an existing lender or even considering a second-charge loan.
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Hague says: “When it comes to funding home improvements there are many different paths that a homeowner can take. However, each must select the best option for their individual situation. For some this may be additional borrowing from their existing lender; for others it may be to remortgage, to take out a loan with a different lender, or saving up for those home improvements.”
For Birmingham Midshires, its specialist-lending wing BM Solutions can offer further borrowing free of extra costs. Hague explains: “BM Solutions offers additional borrowing to customers with an existing Birmingham Midshires mortgage, which means that the customer does not have to face the further costs associated with remortgaging, such as conveyancing fees. Additional borrowing can also be a speedier option, with a quicker release of funds.
“The interest rate at which this additional amount is taken will be dependent on a number of factors. The purpose of the loan and the amount required would both determine the rate at which the client would borrow. For example, different conditions may apply to home improvements.”
Depending on the cost involved, a personal loan could be a potential funding option. “BM Solutions’ Mortgage Plus allows a customer to borrow 95 per cent LTV secured lending and up to 30 per cent or £30,000 (whichever is lower) unsecured lending,” Hague says. “The unsecured lending, which could be used for home improvements, is managed at the same rate as the secured lending, allowing borrowers to access those additional funds at a lower rate than they may find in the marketplace. This also means that they can manage all of their borrowing in one place, with one monthly repayment.”
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One of the often-cited problems with the UK housing market is the lack of properties, particularly when it comes to affordability and the right size of house. In past months the market has been flooded by brand new one-bedroom flats, yet buyers are crying out for houses instead. And just because a buyer has entered the property market with a one or two-bedroom house, it does not necessarily follow that they will be able to afford to move up to a bigger property when their needs change, such as having more children.
In these situations some experts believe that extending an existing property could be a win-win for both homeowners and the market. Bruce Thomson, managing director of remortgage specialist Mortgagesfor-you, agrees, saying: “We believe that this relaxation of the rules can only help the homeowner considering making home improvements. This could well trigger an increase in homeowners ‘staying put’, choosing to enhance the value of their home, through extensions and/or improvements, rather than selling up and moving on.
Ironically if this does happen, and less properties come onto the market in the short term, then this could help a relatively flat housing market.”
Thomson agrees that there is a wealth of funding options currently available to suit different circumstances, but warns that people should also look out for the charges involved rather than just concentrate on the monthly repayment figure. “Borrowers with equity in their homes have a number of options,” he says. “The cheapest way of borrowing the money would typically be to remortgage, if they don’t have early redemption penalties, or ‘further advancing’ with their existing lender, if penalties exist.
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“Secured and unsecured loans are another option, although these tend to be more expensive to the homeowner, both in the interest rate charged and the lack of flexibility (i.e. paying ‘interest only’ to keep monthly costs down is generally not an option).”
Andrew Hood, national sales and marketing director for High Street Home Loans, part of GMAC RFC, believes that the more flexible lending criteria that lenders have introduced in recent years will help borrowers looking to use the equity in their property to pay for improvements.
He explains: “The steps that we and other lenders have made in pushing the boundaries with higher LTVs mean that more people will be able to remortgage and invest in home improvements. However, I don’t think we will see a significant increase in the number of people improving or extending their homes, although with higher house prices and interest rates the way we are, we will see more homeowners staying put for longer.”
The downside of investing in the likes of an extension or loft conversion is all the hard work needed to plan the project, such as finding reliable contractors, from the architect that will design your extension, through to builders to provide a quote and eventually build the thing. And that’s not taking into account all the ensuing upheaval when homeowners finally commit to having the work done.
John Philips, financial services director of estate agent Kinleigh Folkard & Hayward, questions whether the government’s change will really prompt more home improvements. “The relaxation of planning permission rules will certainly make it easier in practice for homeowners to add value to their properties,” he says, “however in reality only a very small percentage of people actually get round to undertaking any major works.
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“This is usually due to the costs, which often escalate, and the length of time in which the family will have to live on a ‘building site’. While major home improvements are the subject at many dinner parties, it is usually just this – talk, and most homeowners will often prefer to move home in order to gain extra space. This said, with more and more home improvement programmes and magazines, an increasing number of buyers are carrying out major works to their homes.”
Philips says it is important that borrowers seek advice from intermediaries to spell out the advantages and disadvantages of the various funding options available to them. “There are four ways in which homeowners can fund home improvements,” he explains. “Remortgage the property, take out a further advance from the existing lender, have a second-charge from a different lender or take out a personal loan.
“By far the most sensible financial choice is to remortgage the property; however, if the mortgage has an early redemption penalty this will not be an option.
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With the remortgage option, the length of time for repayments can be extended and the interest rate is far more competitive.
Philips adds that:“The personal loan is the least attractive as it is over a short term, usually a maximum of 84 months, and as it is an unsecured loan the interest rate will be much higher. A second-charge loan is quick and easy with lower payments because of the length of term, but the interest on this type of loan will be fairly steep because the lender will be second in line, after the mortgage lender, if the property is repossessed.”
In fact secured loans, for so long seen as the consolidation solution for people struggling with debt, could be a viable solution for borrowers, particularly those that do not want to remortgage from their current deal or cannot because of early repayment penalties or other financial issues. A number of the specialist mortgage lenders are now offering second-charge deals at decent rates and with few repayment penalties, opening the way for a secured loan to fund the improvements and then be paid off by a better remortgage deal when rates settle down.
Darren Fry, managing director of secured loans company Prestige Acceptance, explains: “Secured loans, which allow a person to raise additional finance by releasing equity in an existing property, generally offer a faster, stress-free solution to generating capital.
“Secured loans are processed faster than conventional remortgages, with completion dates for loans over £25,000 averaging under two weeks and loans under £25,000 around four weeks as they are regulated by the Consumer Credit Act (2006). Remortgaging an existing low interest rate mortgage can also mean that the consumer will miss out on the advantage of having low interest repayments along with redemption penalties – costs that aren’t incurred with secured loans.”
Whichever way the borrower chooses to fund improvements, it is important to remember that the work should add to the value of the property. Often this means getting expert advice on what improvements are most sought after in the area the borrowers lives in.
Chris Kelly, managing director of Myplace Estate Agents, says: “I believe that, if anything, the new rules should make selling easier. The additions to the homes will increase their value and thereby encourage sales. I believe extensions and loft conversions are equally beneficial to the homeowner. This is especially true if they are to add an extra bedroom, which will add far more value to the property’s final sale price.”
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